Non-Banking Financial Company vs Micro Finance Institution

Narendra Kumar

28 Sep, 2020

Non-Banking Financial Company in India, banks have certain limitations as they are not able to open branches in remote and inaccessible places because India is a geographically large country. For this reason, NBFCs and MFIs operating mainly in rural parts of the country to meet banking requirements of the people.

Though both of these types of entities serve the basic purpose of providing banking facilities, there are some differences between the two entities.

What is Non-Banking Financial Company?

Non-Banking Financial Company is a company registered under the Companies Act which is regulated by the Reserve Bank of India under the RBI Act, 1934. Its 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.

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 the Following Categories of NBFCs:

• Asset Companies
• Loan Companies
• Investment Companies

There is a difference between NBFC & Banks as NBFCs cannot issue checks drawn on itself, and it cannot accept saving deposits in the manner that a bank does. Money deposited in any NBFC does not carry any guarantee like banks. NBFC performs banking functions at a smaller scale in comparison to banks.

What is MFI?

MFI stands for Micro Finance Institutions which exists at a smaller level in comparison to NBFC. MFIs are providing similar services as NBFC to the underprivileged and impoverished sections of the society who do not have access to banking facilities. They provide small funds which vary from Rs.1000-20000 to the poor people to start a business. But there have been complaints of these MFIs regarding irregularities in the functioning as charging higher interest rates from the poor and indulging in providing loans in contravention to the directives issued to such MFI to newly formed groups within 15 days of formation. In many instances, it has been seen that when MFIs get the sanction of credit facility after this there is no review of the functioning of MFI.

The state government is taking necessary steps to convert MFI into NBFC which are better regulated by RBI^[1]. Even MFIs wants to get NBFC status as they will get access to wide-scale funding from banks.

Difference between NBFCs and MFIs

In the absence of banks in the rural area, the non-banking financial company performs similar functions as banks. However, Non-Banking Financial Company cannot issue checks drawn on itself. Whereas, MFI stands for microfinance institutions which operate at a smaller level than NBFC and provide small loans to the underprivileged sections of the society.