NBFC and banks are separate financial intermediaries providing financial services for customers. NBFC stands for non-banking financial company and their financial intermediaries like banks. However, the registration process and major functioning can differentiate both financial intermediaries. So, please read this article to learn about both and understand how they are different from each other.
NBFC: A Brief Introduction
NBFCs are the registered companies under RBI Act 1934. These companies provide financial services and are regulated by Reserve Bank of India. These are not banks, still their activities, like lending money and other offerings, can make them look similar to banks. NBFCs also provide savings, investment, trading facilities, portfolio management, and transferring money from one account to another. NBFC registration for such companies is compulsory. Most activities are related to hire-purchase, leasing, house finance, and venture capital. NBFCs also facilitate deposit facilities but do not work around term deposits and deposits repayable on demand. If we talk about some popular NBFCs working in India. Kotak Mahindra Finance and ICICI Ventures are at the top of the list.
NBFCs can also be divided into categories: NBFC factor, NBFC infrastructure debt fund, account aggregator, investment and credit company, and mortgage guarantee companies.
Banks: A Brief Introduction
These are financial institutions that the central government of India authorizes. They are responsible for services like providing credit, accepting deposits, managing withdrawals, and offering interest on deposits. Banks also provide other services like net banking, cheque facility, home loan, and other services. Banks are very crucial bodies that have a direct connection between borrowers and depositors. Banks also contribute a significant part to the economy of the country. Banks can be divided into public sector, private sector, foreign, and cooperative banks.
Difference between NBFC and Bank
| Basis | NBFCs | Banks |
| Definition | NBFCs provide financial or banking facilities to users without holding a banking license. | These are government-authorized financial institutions to provide financial services. They can be public sector and private sector banks. |
| Registration Act | NBFCs get registered under the companies act 2013. They are non-banking financial companies. | Banks have to get registered under the banking regulation act 1949. |
| Demand Deposit | NBFCs do not offer a demand deposit facility to users. | Banks accept demand deposits from their customers. |
| International Investment | NBFCs are authorized to have foreign investment by 100 percent. | There is up to 74% international investment limit of 74% for private sector banks. |
| Payment and Settlement | NBFCs do not work around payment and settlement; it’s not part of their job. | Payment and settlement is the essential part of banks. |
| Reserve Ratio | These financial institutions do not require to maintain a reserve ratio. | For banks, it’s necessary to maintain the required reserve ratio. |
| Deposit Insurance | In NBFCs, you will not find any deposit insurance facility. | Banks do provide deposit insurance facilities. |
| Credit Facility | NBFCs do not provide credit facilities. | Banks generate credit to generate revenue for themselves. |
| Transaction Facility | NBFCs do not provide the transaction service. | Banks provide transaction facilities to their users. |
Here are some key differences between banks and NBFCs. This section will give you more highlights about how banks and NBFCs are different from each other.
- Banks are approved or authorized to provide financial services to general people. On the other hand, NBFCs are financial companies that provide financial services without holding a banking license.
- NBFCs are established under the Companies Act, 2013, and banks are registered under Banking Regulation Act, 1949.
- Also, NBFCs are not authorized to accept demand deposits. But banks are fully authorized to accept demand deposits and provide interest.
- NBFC can get up to 100% foreign investment; they are allowed for this. However, private sector banks can get up to 74% foreign investment.
- NBFCs do not deal with payment and settlement-related matters. But it’s an essential part of banks’ day-to-day activities. Banks have to handle payment and settlement matters to run successfully.
- Banks must maintain proper CRR, SRR, and other required ratios. Whereas NBFCs do not need to maintain such reserve ratios.
- Deposit Insurance and Credit Guarantee Corporation or DICGC allow depositors to get a deposit insurance facility. However, NBFCs do not provide such facilities to their customers.
- Banks are allowed to create credit, but NBFCs are not allowed to do the same. It’s the place where banks and NBFCs both look different in terms of their functioning.
- Banks also provide transaction facilities to their customers. They also provide overdraft, cheque, and fund transfer facilities. But NBFCs do not provide such services to their customers.
Conclusion
NBFCs and banks both are two different financial institutions. Both have different registration processes, areas of functioning, and regulating authorities. The government of the country mostly authorizes banks. They must maintain the necessary reserve ratio and provide other banking services. Whereas the Reserve Bank of India strictly regulates NBFCs. They mainly provide credit services to the retail sector and poor section of society. NBFCs are also allowed to operate other business if needed. However, banks are limited to providing their customers with financial and credit facilities.
Thus, we hope you have understood the major difference between NBFCs and banks. If you are willing to learn such interesting things, stay tuned without our website. We keep publishing such research-based and helpful financial information for you.