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Difference between Banks and NBFCs

Narendra Kumar
09 Feb, 2021 09 Feb, 2021
Difference between Banks and NBFCs

In this article, we will analyze the difference between banks and NBFCs in great detail considering their meaning, types and other considerations.

Meaning

The term NBFC refers to Non-Banking Financial Company and for NBFC Registration the company is registered under the Companies Act, 1956 and it is governed or regulated by the Reserve Bank of India under RBI Act, 1934[1]. Basically, the non-banking finance company is not banks but they are involved in lending and other activities like a bank, it is involved in the activities of hire purchasing, leasing, infrastructure finance, venture capital finance, housing finance, etc. In India, nonbanking finance company emerged during the middle of 1980. Kotak Mahindra Finance, Capital First, Muthoot Finance, Bajaj Capital, ICICI Ventures are some of the examples of popular Non-Banking Finance Company

Whereas Banks are the traditional financial institution, which is involved in lending the money and other financial. Banks are regulated by Banking Regulation Act 1948. Examples of Bank are Punjab National Bank, ICICI Bank, HDFC Bank etc.

Types or Categories

NBFC Registration can be done in any of the following categories-

  • Asset Finance Company- An Asset Finance Company is that type of Non Banking Financial Company who’s more than 60 percent of asset is financial asset in comparison to the whole asset of the company or we can say that the income or profit of the company is more than 60 percent from financial asset than another asset of that company.
  • Investment Company -An Investment Company is that kind of company whose primary business deals with the acquisition of stocks, shares, debentures, bonds, debentures or securities
  • Loan company- Loan Company is that kind of Non-Banking Financial Company whose nature of the main business is providing finance in the form of loans or advances. This kind of companies is usually small partnerships or private limited company which obtains the money in the form of deposits from the general public and give the loans to the individuals such as wholesale and retail traders, small-scale industries and people who are self-employed.
  • Mortgage Guarantee company- Mortgage Guarantee Companies are those kind financial lending institutions in which at least 90% of the business or profit turnover is because of mortgage guarantee business.
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Whereas Banks are divided into the following categories-

  • Public sector bank- Public Sector Banks are those kinds of the financial institution where a majority stake is held by the government. Public sector banks shares are listed on stock exchanges. Example of a public sector bank is Canara Bank, Punjab National Bank, etc.
  • Private sector bank- The private sector banks are that kind of financial institution where larger parts of share or equity are held by private shareholders, not by the government. Example ICICI Bank, HDFC Bank, Axis Bank, etc
  • Foreign bank – The foreign bank are those bank which has the obligation of following the regulations and compliances of both the country that is home and host country. Loan limitation for these banks is based on the parent’s bank capital. Example Deutsche Bank

Other differences are listed below in the table (Banks and NBFCs)

ParticularNBFCBANK
   
Incorporating BodyNBFCs are incorporated as a company under the Companies Act, 2013.Banks are incorporated under the Banking Regulation Act, 1949.
License requirementNBFC is issued Certificate of Registration (CoR) by RBIThey hold Bank License.
Acceptance of demand depositNBFC cannot accept deposit repayable on demand.Acceptance of demand deposits is one of the main functions of banks.
Foreign Direct Investment100% FDI is allowed in case of NBFCOnly Private Sector banks are allowed to accept FDI and that too only up to 74%.
Payment and Settlement systemNBFC does not form a part of payment and settlement system.Banks are an integral part of payment and settlement cycle
Maintenance of Reserve ratioNBFCs are not required to maintain any reserve ratios.It is mandatory for the bank to maintain the reserve ratios like CRR or SLR
Insurance Deposit FacilityNot available in case of NBFC.It is allowed to the depositors of banks by Deposit Credit Guarantee Corporation (DICGC)
Credit FacilityCredit creation is not allowed in case of NBFC.Credit creation is allowed in case of Bank.
Overdraft FacilityNBFC is not allowed to provide any overdraft facility to its customers.Overdraft facility is provided by Banks.
Transaction ServicesNBFC is not allowed to provide transaction facilities like transfer of funds, issuance of traveler’s cheque.Banks can provide transaction services like transfer of funds, issuance of traveler’s cheque to its customers.
Client Base for a Loan facilityNBFC target client bases are startups and unprivileged class of society which are not entertained by Banks. Thus making lending more approachable to them.Banks provide loans to established players and MSMEs which have good credit scores and high CIBIL Scores
Interest RateNBFCs charge higher interest rates. No capping for Interest rates is defined.In the case of Banks capping for interest rates are defined by Reserve Bank of India.
Loan ProcessingAs Non-Banking Financial Company which are based on Fintech model, here loan processing is much faster. 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.

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