Introduction
With rising defaults and financial stress post-COVID, loan settlement has become a vital option for many borrowers. Whether your loan was taken from a bank or an NBFC (Non-Banking Financial Company), the settlement process can differ significantly. Knowing these differences can help you navigate negotiations, protect your credit score, and avoid legal hassles.
In this guide, we’ll explore the key differences between loan settlements with NBFCs and banks, the role of RBI guidelines, and how to approach each effectively.
What is Loan Settlement?
Loan settlement is a formal agreement between a borrower and lender to close the loan account by paying a reduced amount (less than the total outstanding), usually when the borrower is unable to repay due to genuine financial hardship.
Once settled:
- The lender waives off the remaining dues.
- The account is marked as “Settled” in your CIBIL report.
- The credit score takes a temporary hit, but it’s better than default.
📌 Related: Top Loan Settlement Myths Busted – What Borrowers Must Know
Difference Between NBFCs and Banks in Loan Settlement
Let’s break it down across various factors:
1. Regulatory Framework
- Banks are strictly governed by the Reserve Bank of India (RBI).
- NBFCs also fall under RBI, but their compliance and operational norms are comparatively lenient.
Implication for settlement:
Banks often follow more formal and documented procedures for settlement. NBFCs may offer flexible and quicker settlements, though they may also charge higher penalties or interest.
2. Approach to Negotiation
- Banks have centralized departments and may take longer for approval. They’re often rigid with settlement percentages.
- NBFCs, being smaller or more agile, may allow faster negotiation, but their terms can vary significantly.
Pro Tip: If you are dealing with NBFCs like Bajaj Finserv or Fullerton India, negotiation with documentation is crucial to avoid future recovery issues.
3. Legal Action and Recovery Methods
- Banks tend to follow a legal recovery process (like SARFAESI Act, arbitration, or DRT).
- NBFCs often depend on external recovery agents and may lack the legal depth that banks follow.
Important: Some NBFCs may use aggressive collection tactics. If you face harassment, you have the right to file a complaint with the RBI Ombudsman or a legal advisor.
📌 Related: How Loan Settlement Agencies Negotiate with Banks: Insider Insights
4. Documentation and Settlement Letters
- Banks usually provide standardized settlement letters, which are valid in courts and with credit bureaus.
- NBFCs sometimes delay or avoid giving official settlement letters unless explicitly demanded.
Must-Do: Always demand a written settlement letter from NBFCs to avoid future claims or disputes.
📌 Read More: Settlement Letters: Why They’re Crucial and How to Get One
5. Impact on CIBIL and Credit Reports
- Both banks and NBFCs report settled accounts to credit bureaus.
- However, banks are more consistent with reporting, while NBFCs may delay updates, causing prolonged impact.
Note: Some NBFCs do not update status properly even after settlement—follow up regularly and file a dispute if needed on CIBIL or Experian.
How to Settle Loans from NBFCs vs. Banks
Steps for Banks:
- Submit a written request stating your inability to pay.
- Negotiate through email or authorized communication.
- Get an official settlement offer on letterhead.
- Pay via official mode (cheque/RTGS).
- Get a No Dues Certificate and Settlement Letter.
Steps for NBFCs:
- Contact their settlement/collections team directly.
- Ensure the offer is documented (email or hard copy).
- Clarify all penalties, late fees, and final amount.
- Make payment only after confirmation.
- Ask for a final settlement letter + NOC.
RBI Guidelines on Loan Settlement
According to RBI’s 2023 guidelines, both banks and NBFCs must:
- Assess the borrower’s repayment capacity.
- Avoid coercive collection tactics.
- Provide full disclosure of terms during settlement.
- Report settlement status accurately to credit bureaus.
You can read the detailed guidelines on the official RBI site.
Should You Hire a Loan Settlement Agency?
Many borrowers find it tough to negotiate directly. That’s where loan settlement experts can help:
✅ Negotiate better terms with NBFCs or banks
✅ Help reduce principal + interest legally
✅ Ensure proper documentation to safeguard your rights
📌 Explore: Guardian Financial Experts – India’s Trusted Loan Settlement Agency
Case Study Example
Mr. Rakesh, a salaried employee from Pune, had:
- ₹2.5L credit card debt with an NBFC
- ₹3.8L personal loan from a private bank
Results with Guardian Financial Experts:
- Settled NBFC loan at ₹1.1L within 30 days
- Bank loan negotiated to ₹2L, paid in two EMIs
- Received NOC and both accounts marked “Settled” on CIBIL
👉 Real settlement. Real freedom.
Conclusion
Loan settlement is a lifeline for financially stressed borrowers, but knowing the difference between NBFCs and banks can make or break your financial recovery.
Whether you’re dealing with a traditional bank or an NBFC:
- Stay informed
- Negotiate smartly
- Get everything in writing
Need expert help?
📞 Contact Guardian Financial Experts for a free consultation and start your journey toward debt-free living.
FAQs on Loan Settlement: NBFCs vs. Banks
Q1. Is it easier to settle loans with NBFCs than banks?
Yes, NBFCs are usually more flexible, but caution is needed regarding documentation.
Q2. Will my CIBIL score be affected differently?
No, both NBFC and bank settlements are reported and impact credit similarly.
Q3. What if the NBFC refuses to issue a settlement letter?
You can file a written complaint with the RBI Ombudsman or take legal action.