Points of Difference Between Banks and NBFC

There was a time when Loans specifically meant Banks. However, now the scenarios have changed, and we have Non-Banking Financial Companies, better known as NBFCs helping people to fulfil their money requirements. NBFC is a company which provides financial services to people without holding a Bank license. Now Banks and NBFCs are two major types of financial intermediaries in our country. India is home to over 12,000 NBFCs and 1000 Banks in Public Sector Undertaking (PSU), private, cooperative, regional, local, small finance and payment categories. NBFCs can be considered as a complement to Banks as Banks alone would not have been able to serve the requirement of all. Although the services provided by both entities are almost similar, there are some key differences between banks and NBFCs.

A bank is a government entitled financial intermediary registered under banking regulation act, 1949. Banks conduct activities like accepting deposits, granting credit, managing withdrawals, clearing cheques and providing general utility services to its customers. Banks dominate the entire financial system of the country. Banks can be public sector banks, private sector banks or foreign banks.

An NBFC is a company that provide financial services to people without holding a bank license. NBFC Registration are done under the Companies Act, 2013 and regulated by the Central Bank, i.e. Reserve Bank of India under RBI Act, 1934. NBFCs are not banks. However, they are engaged in the lending and other activities similar to that of banks like providing loans and advances, credit facility, trading in the money market, transfer of money control, and so on.

• A bank is a government authorised financial intermediary that aims at providing banking services to the general public. On the other hand, NBFC is a company providing banking services to the general public without holding a banking license.

• Banks are registered under the Banking Regulation Act, 1949, whereas NBFCs are registered under the Companies Act,2013.

• Banks allow Foreign investments up to 70-75% on the other hand, NBFCs allows 100% foreign investment.

• Banks are allowed to issue ATM cards whereas NBFCs are not authorised to issue ATM cards.

• Banks are an integral part of the payment and settlement cycle while NBFC is not a part of the system.

• Banks can accept all type of deposits whereas, on the other hand, NBFCs cannot accept the demand deposits. The Reserve Bank of India’s deposit insurance covers the deposits made in Banks. However, no such deposit insurance is given to NBFCs.

• Savings or Current Account can be opened at the Banks whereas NBFCs are not licensed to open Savings or Current Accounts.

• Banks have to maintain reserve ratios like CRR or SLR, whereas NBFCs do not have to maintain reserve ratios.

• NBFC s are permitted to offer Asset restructuring for individuals and companies while Banks are not allowed to provide this service.

A demand deposit is a bank account which allows the customer to withdraw his money from the bank at his will without any prior notice to the bank. In lay-mans language, Demand deposits can be defined as the money supply of a country. Demand Deposits are significant from the monetary policy angle and the institutions accepting demand deposits are strictly controlled and regulated by the RBI. NBFCs also known as shadow banks, are not allowed to permit or accept Demand deposits because these institutions are not controlled and regulated by the RBI.

Demand deposits are accessible in many ways such as ATM, Net Banking etc. Hence banks have to discharge the demand deposits as soon as they accept. This is not the case with NBFCs; since they are not allowed to issue ATM cards, they cannot accept Demand deposits.

In recent years, NBFCs have seen an exponential growth both in terms of demand and service. Since NBFCs do not have strict requirements and offer quick loans, these entities are becoming more and more popular. India is a large economy and Banks alone cannot cater to the financial needs of the country. So NBFC Registration with RBI is complimenting Banks in their services with certain limitations imposed on them which are not there for Banks.