NBFC

Difference between Banks and NBFCs

Banks and NBFCs (Non-Banking Financial Companies) are the key financial intermediaries and offer almost similar services to customers. The basic difference between banks & NBFCs is that NBFC cannot issue cheques and demand drafts like banks. Banks take part in country’s payment mechanism whereas Non-Banking Financial Companies are not involved in such transactions.

NBFC came into both public and private sector to complement banks in providing finance to people because banks cannot cater to all sections of the society alone as finance is the basic requirement of all individuals and businesses.

An Overview on NBFCs

NBFC is a registered company which is regulated by the Reserve Bank of India under RBI Act, 1934. NBFCs are not banks, but their activities are related to lending and other activities such as providing loans and advances, credit facility, savings and investment products, trading in the money market, managing portfolios of stocks, transfer of money, etc. For commencing the activities of NBFCs, NBFC Registration is mandatory.

Their activities are concerned with hire purchasing, leasing, infrastructure finance, venture capital finance, housing finance, etc. NBFC can accept deposits, but only term deposits and deposits repayable on demand are not accepted by NBFC.

Here are some of the examples of popular NBFCs such as Kotak Mahindra Finance, SBI Factors, Sundaram Finance, ICICI Ventures.

NBFC is divided into the following categories:

• Investment and Credit Company;
• Mortgage Guarantee Companies;
• Micro finance company;
• NBFC Factor;
• NBFC Infrastructure Debt Fund;
• NBFC Account Aggregator;
• NBFC Peer to peer lending platforms;
• Housing finance Companies.

An Overview on Banks

Banks are the financial institution which is authorized by the government to conduct banking activities such as accepting deposits, granting credit, managing withdrawals, paying interest, clearing cheques and providing general utility services to the customers.

Banks are considered an apex organization which dominates the entire financial system of the country. They act as a financial intermediary between the depositors and borrowers. Banks ensures smooth functioning of the economy in the country.

They can be public sector banks or private sector banks or foreign banks and also responsible for making loans, creating credit, mobilization of deposits, safe and time-bound transfer of money and providing public utility services. Its ownership lies with the shareholder and they operate with the profit motive.

Difference between Banks and NBFCs

Here are the differences between Banks and NBFCs:

• Banks are the government authorized financial intermediary that aims at providing banking services to the general people. Whereas NBFCs provides banking services to people without carrying a bank license.
• An NBFC is incorporated under the Companies Act whereas a bank is registered under the Banking Regulation Act, 1949^[1].
• NBFCs are not allowed to accept deposits which are repayable on demand whereas banks accept demand deposits.
• In NBFC, foreign Investments up to 100% is allowed. Whereas in the case of private sector banks they are eligible for foreign investment, but which would be no more than 74%.
• Banks are an integral part of the payment and settlement cycle while NBFC is not a part of this system.
• It is mandatory for banks to maintain reserve ratios like CRR or SLR. Whereas in the case of NBFC it is not required to maintain reserve ratios.
• Deposit insurance facility is allowed to the depositors by Deposit Insurance and Credit Guarantee Corporation (DICGC). In the case of NBFC, this type of facility shall not be available.
• Banks can create credit whereas in case of NBFC they are not involved in the creation of credit.
• Banks can provide transaction services to its customers such as providing overdraft facility, issue of traveller’s cheque, transfer of funds, etc. Whereas these type of services cannot be provided by NBFC.

The below mentioned table will allow you to have a better and easy understanding of difference between banks and NBFCs.

Comparison Chart-

Basis of Comparison	NBFCs	Banks
Meaning	They provide banking services to people without holding Bank License	It is government authorized financial intermediary which aim at providing banking services to the public.
Regulated under	Companies Act 2013	Banking Regulation Act 1949
Demand Deposit	Cannot be Accepted	Can be Accepted
Foreign Investment	Allowed up to 100%	Allowed up to 74% for Private Sector Bank
Payment and Settlement system	Not a part of the System	An Integral part of the System
Maintenance of Reserve Ratios	Not Required	Mandatory
Deposit Insurance Facility	Not Available	Available
Credit Creation	NBFC does not create Credit	Bank create Credit
Transaction Services	Cannot be provided by NBFC	Provided by Bank

Conclusion

The main objective for which NBFC’s are established is to grant credit to the poor section of the society whereas the banks are the financial intermediaries authorized by the government to receive deposits and grant credit to the public. Licensing of banks and NBFCs also differ in terms that licensing requirements of a bank are more stringent in comparison to NBFC. Banks cannot operate any business other than the banking business whereas an NBFC can operate such businesses.

Read our article:Fintech and NBFC: Key differences