NBFC

Difference between Banks and NBFCs

Banks and NBFCs

The two most common categories of financial intermediaries in any financial system are banks and Non-Banking Financial Companies. The traditional institutions that accept public deposits and give loans to the public are banks. Banks currently carry out a number of other tasks, such as merchant banking and other financial services, in addition to mobilizing deposits and dispensing loans. In this blog, we will discuss the difference between Banks and NBFCs.

Non-Banking Financial Companies (NBFCs), on the other hand, provide a wide range of financial services to various consumer categories without a banking license. The RBI regulates banks in accordance with the Banking Regulation Act, while the RBI regulates non-banking financial companies in accordance with specific provisions of the RBI Act.

Because finance is a fundamental need for all people and enterprises, NBFC entered both the public and private sectors to support banks in delivering credit to people. This is because banks cannot serve all sections of the society.

Non-Banking Financial Companies (NBFC)

The Reserve Bank of India regulates NBFC as a registered company under the RBI Act of 1934 and registered under the Companies Act 20131. Although NBFCs are not banks, they engage in lending and other operations, including offering loans and advances, credit facilities, savings and investment products, money market trading, managing stock portfolios, money transfers, etc. NBFC Registration is required before NBFCs can begin their operations. They serve the needs of individuals, businesses, and companies that would not have access to conventional banking services, making them crucial to India’s financial system.

One of the key advantages NBFCs have over banks is that they are more flexible in their lending practices. Companies are free to design and modify loan products in any way they deem fit to meet their clients’ particular needs. NBFCs are a preferred choice for persons and small businesses that might not meet the stringent requirements of traditional banks. 

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There are two categories of NBFCs: 

  • NBFCs that accept deposits 
  • Non-deposit-taking NBFCs.

Deposit-taking NBFCs must abide by specific guidelines established by the RBI and can accept deposits from the general public. Based on the size of the deposits they accept, they are further divided into three groups:

  • Systematically Important Deposit-taking NBFCs – These are NBFCs that accept deposits of Rs. 50 crore or more and have assets of Rs. 500 crore or more.
  • Non-Systematically Important Deposit-taking NBFCs – NBFCs that accept deposits of less than Rs. 50 crore are known as non-systematically important deposit-taking NBFCs, and they have assets under Rs. 500 crores.
  • Residuary Non-Banking Companies – RNBCs are non-banking financial institutions that accept deposits and make investments in approved securities.

Non-Deposit-taking NBFCs are not subject to the same restrictions as Non-Banking Financial Companies that take public deposits because they do not accept public deposits. They can offer lease services, credit facilities, and other financial services.

A business must have a Net Owned Fund (NOF) minimum of Rs. 2 crores in order to function as an NBFC. The total capital given by shareholders, free reserves, and other instruments is known as the NOF. For the registration and operation of NBFCs, the RBI has additionally established a number of additional rules and regulations.

Banks

A bank is a financial institution that offers its clients a range of financial services, such as deposit accounts, loans, and other financial services. Banks are essential to the economy because they give people and businesses the money they need to invest and expand.

Banks function by receiving deposits from clients and disbursing funds to borrowers. In addition to paying interest to depositors, they make money by charging interest on loans and investments.

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Government agencies, usually central banks, control the laws and regulations that apply to the banking sector. Banks offer a wide range of services to their customers in addition to deposit accounts like checking and savings accounts. Customers can save money in these accounts in a safe and secure setting while also earning interest on their deposits.

Banks offer credit products besides loans and credit cards that permit customers to borrow money for a range of purposes. Additionally, banks offer investment services such as trading in stocks, bonds, and mutual funds. Through these services, customers have the choice to invest their money in a selection of financial assets, providing them with the potential to make a profit on their initial investment.

Due to technological advancements and growing competition from non-bank financial institutions, the banking sector has seen considerable changes recently. Customers can now access their accounts and complete transactions from their desktops or mobile devices due to the growing popularity of online banking.

Banks are divided into the following categories-

  • Public sector bank– Public sector banks, which are financial institutions in which the government owns the majority of the stock. Shares of public sector banks are traded on stock markets. Canara Bank, Punjab National Bank, etc., are examples of public sector banks.
  • Private Sector Bank – Private sector banks are the types of financial institutions where individual investors rather than the government hold the majority of the stock or equity. ICICI Bank, HDFC Bank, Axis Bank, etc.
  • Foreign bank – A foreign bank is a bank that is required to abide by the laws and regulations of both its home nation and the host nation. The parent bank’s capital determines how much money these banks can lend. 

Difference between Banks and NBFCs

Basis of ComparisonNBFCBank
Incorporating BodyNon-Banking Financial Companies are incorporated as a company under the Companies Act, 2013.Banks are incorporated under the Banking Regulation Act of 1949.
License requirementRBI issues the NBFC with a Certificate of Registration (CoR).They hold Bank License.
Foreign Direct Investment100% FDI is allowed in the case of NBFC.Only Private Sector banks are allowed to accept FDI and that too only up to 74%.
Demand deposit acceptanceNBFC cannot accept deposits repayable on demand.Acceptance of demand deposits is one of the main functions of banks.
Lending Standards and PracticesCompared to banks, NBFCs may have more lenient lending standards and practices.Compared to NBFCs, banks may have stricter lending guidelines and standards.
Payment and Settlement SystemNBFC does not comprise a payment and settlement system component.Banks are an integral part of the payment and settlement cycle.
Maintenance of Reserve ratioNo reserve ratios must be kept in place by NBFCs.The bank must maintain the reserve ratios like CRR or SLR.
Insurance Deposit FacilityNot available in the case of NBFC.It is allowed to the depositors of banks by Deposit Credit Guarantee Corporation (DICGC).
Credit FacilityCredit creation is not allowed in the case of NBFC.Credit creation is allowed in the case of Banks.
Overdraft FacilityNBFC is not allowed to provide any overdraft facility to its customers.Banks provide overdraft facilities.
Transaction ServicesNBFCs are not permitted to offer transaction services like money transfers or traveller’s checks.Banks can offer their customers transaction services, including money transfers and the issue of traveller’s checks.
Client Base for Loan FacilityStart-ups and underprivileged strata of society, who are not catered to by banks, are the target client bases of NBFC. lending more approachable to them as a result.Banks lend to well-established businesses and MSMEs with high CIBIL ratings and solid credit scores.
Interest RateHigher interest rates are charged by NBFCs. There is no defined cap on interest rates.In the case of Banks capping for interest rates is defined by the Reserve Bank of India.
Loan ProcessingAs a Non-Banking Financial Company based on the Fintech model, loan processing is much faster here. NBFC process loan within six to twelve hours.Banks are more traditional in their approach. After document verification, it will take almost 5 to 6 days to complete.

Conclusion:

While the government charters banks to accept deposits and provide credit to the general public, NBFCs are primarily founded to provide credit to the underprivileged sections of society. A bank must adhere to stricter licensing requirements than an NBFC. Knowing the functions of each can help individuals and businesses in selecting the appropriate institution to approach for their financial requirements.

READ  Role of NBFCs in accelerating financial inclusion

FAQs: –

How are central banks in charge of the financial sector governing the banking industry?

A country’s central banks implement its monetary system and manage the money supply. For instance, the central bank may increase interest rates to curb borrowing and spending when the economy is on the edge of overheating. On the other side, if the economy is weak, the central bank may decrease rates to promote borrowing and increase spending.

What is the basic difference between banks and NBFCs?

A bank is a government-authorized organization that offers banking services to the public; in contrast, an NBFC is a business that offers banking services to the public without possessing a bank license.

Why are NBFCs, not banks?

Because they were established and registered under the Companies Act of 2013 and carry out financial operations without a banking license, NBFCs are not considered banks.

In what way is an NBFC better than a bank?

An application is approved by NBFCs for the loan in just 24 hours, making the provision of services seamless in NBFCs.

What are the main uses of Banks?

Banks’ main uses and services are deposit services, lending, savings, investment services, payment services, foreign exchange services, Insurance services, etc.

What are the main uses of Non-Banking Financial Companies?

NBFCs offer serval services, and their main uses are consumer loans, equipment finance, microfinance, business loan, housing finance, wealth management, Vehicle finance, etc.

Read our article:Fintech and NBFC: Key differences

References

  1. https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks.html

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