NBCFs and banks act as financial intermediaries and offer quite similar services. But there are many points of difference. There are very strict licensing regulations for banks compared to NBFCs.
What is an NBFC?
The main business activities of a Non-Banking Financial Company consist of loans or financial leasing or purchase in installments, accepting deposits or acquisitions of stocks, shares, bonds, etc. To start any business, they must acquire a license from RBI and are regulated by RBI.
Based on responsibility, NBFC It can be with or without a deposit. NBFC can belong to the following categories:
- Loan company
- Asset financing company
- Investment company
What is a bank?
Banks perform activities such as granting credit, demand deposits, and providing withdrawals, interest payments, check clearing, and other general public services to their clients.
They dominate the country’s financial sector and provide a link as a financial intermediary between borrowers and depositors.
Key differences between NBFC and Bank
Now that we have analyzed the activities carried out by both institutions separately, let’s analyze how NBFCs and banks differ in their nature and functionalities.
- NBFC is first incorporated as a company under the Indian Companies Act 1956 and then applies for the NBFC license from RBI; on the other hand, the bank is registered under the Banking Regulation Law of 1949.
- Banks are government-authorized financial intermediaries that are authorized to receive deposits and grant credit to the public. However, NBFC is a company that provides banking services to smaller sectors of society without having a banking license.
- Banks are allowed to accept demand deposits, but NBFCs are not allowed to accept deposits that are repayable on demand.
- Since NBFCs are established as companies under the Companies Act 2013, they can accept up to 100% foreign investment. But banks can only accept foreign investment up to 74% of its total amount.
- Like a bank, NBFCs are not an integral part of the country’s payment and settlement cycle.
- RBI requires banks to maintain reserve ratios such as CRR or SLR. NBFC has no such obligation.
- The Deposit Insurance and Credit Guarantee Corporation (DICGC) provides a deposit insurance service to bank depositors. This facility is not available in the case of NBFC.
- NBFC does not participate in the creation of credit as banks do for their clients.
- Banks provide services such as the facility for overdrafts, the issuance of traveler’s checks, the transfer of funds, etc. NBFC does not provide such services.
- NBFCs cannot write checks drawn on themselves like banks can.
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