What is the Difference Between a Bank and NBFC

Nov 17th 2023
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What is the Difference Between a Bank and NBFC

Difference Between Banks And NBFCs, Financial institutions provide to every essential aspect of society. They have an impact on governments and corporations in addition to individuals. NBFCs and banks are the most well-known financial organizations for all needs related to money. But what distinguishes them from one another?

A bank and a non-banking financial company (NBFC) are two distinct types of financial organizations that operate under very different regulations and have very different business strategies. A non- bank financial company, or NBFC, is a business that conducts comparable banking activities without a banking licence. A bank is an approved government financial institution.

Banks accept deposits and lend money to parties through loans. Unlike banks, which take deposits from clients and provide loans and other types of credit, nonbank financial institutions (NBFCs) offer business loans and credit lines to small businesses and individuals.

Another financial organisation must exist as a non-banking financial firm since so many different groups of society need different kinds of financial help. Thus, by highlighting the distinctions between banking and non-banking financial organizations, we will go into the specifics of what these two institutions are and how they operate in this blog post.

What Is a Bank?

Financial entities known as banks take deposits from depositors and lend the money to borrowers at interest. The most prevalent form of bank in the world is the commercial bank, which provides check-writing services, savings and current account services, and lending options to individuals seeking to borrow money for small business loans or mortgages. The government regulates banks extensively, and they have to follow tight guidelines when it comes to lending.

Banking is defined as taking deposits of public funds for lending and investment purposes that are otherwise repayable upon demand and withdrawable by check or draught, as per the Banking Companies (Regulations) Act of India, 1949.

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Put otherwise, a bank is an organisation that handles a variety of financial tasks, such as taking deposits and extending loans. It is a government-approved body that has been granted permission to handle the financial demands of the whole economy and society. Among the essential tasks that
banks carry out are the following:

  • Receiving time deposits or demands
  • Neglecting the notes
  • Interest payment
  • Giving out loans
  • Putting money into securities
  • Receiving draughts, notes, and checks
  • releasing draughts

Because banks are seen as heavily regulated, their role in the economy is vital because they uphold the nation's financial stability.

What is a Non-banking Financial Corporation?

Non-Banking Financial Companies, or NBFCs, provide the general public with financial services. According to the Companies Act of 1956, they are subject to Reserve Bank of India (RBI) regulation and are required to register with the RBI. NBFCs are granted licences by the RBI to operate in a particular way.

NBFCs are often limited to accepting fixed deposit and recurring deposit types and are not allowed to open public bank accounts. Furthermore, they are prohibited from lending to the general public, with the exception of loans secured by gold or used to fund specific types of equipment or automobiles. They must also pay interest on public deposits, in addition to other obligations.

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Difference Between Banks and NBFCs

In terms of their roles as financial institutions, let's examine the distinctions between banking and non-banking financial companies.

1. The Reserve Bank of India Act of 1934 and the Banking Regulation Act of 1949 control banks in India as licenced financial organizations. Non-Banking Financial Companies, or NBFCs, are governed by the Reserve Bank of India Act of 1934 and are established in accordance with the rules of the
Companies Act of 1956 or the Companies Act of 2013.

2. A variety of services are offered by banks to its clientele. These services include credit card facilities, loan advances, guarantees, money remittances, check payments and more. On the other hand, NBFCs offer services related to mutual funds, equities, insurance, savings and investment programmes, and more.

3. NBFCs, as opposed to banks, obtain deposits through the securitization process, whereas banks's main operations are receiving deposits and making loans.

4. Repayable deposits are accepted by banks, however NBFCs are not allowed to engage in the business of taking such deposits.

5. While banks can accept up to 74% of their foreign investments, NBFCs can accept up to 100% of their foreign investments.

6. The main duty of banks is to participate in the cycle of payments and settlements. Non-Banking Financial Companies, on the other hand, are not a part of any cycle of payments and settlement.

7. Statutory Liquidity measures (SLR) and Cash Reserve Ratios (CRR) are two measures that banks are required to keep up to date. In contrast, NBFCs are exempt from maintaining these ratios.

8. The Deposit protection and Credit Guarantee Corporation (DICGC) offers deposit protection, however NBFCs are not eligible to use this service.

9. Banks have the ability to participate in credit creation. However, NBFCs are unable to establish credit.

10. Non-Banking Financial Companies do not offer the transactional services that banks do, such as deposits, cash withdrawals, checks, debit card payments, and even internet payments.

Comparison Table Between Banks and NBFCs

Parameters Banks NBFCs
 1.Licensing and Regulation The Reserve Bank of India Act of 1934 and the Banking Regulation Act of 1949 both control banks as licenced financial entities. Although they have authorized financial institutions, NBFCs are not authorized. They are governed by the Reserve Bank of India Act of 1934 and are established in accordance with the Companies Act.
2. Types of Services Banks offer services like loan advances, credit card facilities, guarantees, money transfers, and check payment. Services offered by NBFCs include mutual funds, stocks, insurance, savings and investment programmes, and more.
3. Deposit Function The primary function of banks’ business is accepting deposits and offering loans. NBFCs deal in deposits for the process of securitisation.
4. Acceptance of Demand Deposits Banks taks money  deposits repayable as per the need. NBFCs are not allowed to take demand deposits.
5. Extend Foreign Investment Banks are meant for foreign investments up to 74% NBFCs are allowed for foreign investments up to a maximum of 100%.
6. Payment and Settlement Cycle Banks are part of the payment and settlement cycle. NBFCs do not form part of any such payment and settlement cycle.
7. Maintenance of CRR and SLR Banks are obliged to maintain ratios like Cash Reserve Ratios (CRR) and Statutory Liquidity Ratios (SLR). CRR and SLR are not allowed in the case of NBFCs.
8. Facility of DICGC Banks come with  deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC). NBFCs don't have this facility.
9. Creation of Credit Banks get engaged in creating credits. Credit creation is not feasible for NBFCs.
10. Option of Transactional Services Banks generally offer transactional services like deposits, cash withdrawals, checks, debit card payments, or even online payments. NBFCs do not provide such types of transactional services.

FAQs

1. How Come NBFCs Aren't Banks?

Because they were established and registered under the Companies Act of 2013 and conduct financial operations without a banking licence, NBFCs are not regarded as banks.

2. What Distinguishes Financial institutions From Banks?

The main feature that sets banks apart from other financial organizations is that their primary role is to take deposits for both demand and savings accounts.

3. What Distinguishes an NBFC From a Bank?

The lending services provided by NBFCs are smooth, and applications are approved in as little as 24 hours.

The Conclusion

In summary, while both banks and non-banking financial companies (NBFCs) offer financial services, their methods of operation differ. NBFCs are generally focused on providing lending operations to businesses, while banks typically accept and issue loans. Individual consumer financial demands have also been met by NBFCs in recent years. In addition, banks mostly deal in stocks and shares while offering their customers financial guidance. NBFCs, on the other hand, offer a wide range of financial services, including securities, insurance, and investing. The numerous laws and regulations that the government has in place also heavily control banks. NBFCs adhere to the guidelines established by the Reserve Bank of India. We hope the post on the distinctions between banks and NBFCs was enjoyable.

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