Banks and NBFCs Compared: Key Differences You Need to Know in 2025

When it comes to financial services in India, most people are familiar with banks. But there's another key player in the game—NBFCs, or Non-Banking Financial Companies. While both provide loans, investments, and other financial products, there are major differences between the two.

In this blog, we’ll break down the key differences between banks and NBFCs in a simple and clear way, so that you can better understand which one suits your financial needs.

What is a Bank?

A bank is a government-regulated financial institution that accepts deposits from the public and provides loans, credit cards, and other financial services. Banks in India are regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949.

Common Examples of Banks:

• State Bank of India (SBI)
• HDFC Bank
• ICICI Bank
• Punjab National Bank (PNB)

What is a Non-Banking Financial Company (NBFC)?

An NBFC (Non-Banking Financial Company) is a financial institution that offers similar services like loans, asset financing, investment products, etc., but does NOT have a banking license. NBFCs are also regulated by the RBI, but under the Companies Act, 2013 and RBI Act, 1934 (Chapter III B).

Common Examples of NBFCs:

• Bajaj Finance
• Tata Capital
• Muthoot Finance
• Shriram Finance

Key Differences Between Banks and NBFCs

While both banks and NBFCs provide financial services, their operations, regulations, and offerings differ significantly. Below is a detailed comparison:

Regulation and Licensing

• Banks: Governed by the Banking Regulation Act of 1949 and the RBI Act of 1934, requiring a banking license from the RBI.
• NBFCs: Registered under the Companies Act and regulated by the RBI, but without a banking license, limiting their operational scope.

Services Offered

• Banks: Offer a broad range of services, including loans, credit cards, money transfers, and payment facilities like checks and online banking.
• NBFCs: Focus on niche offerings such as mutual funds, insurance, stock investments, and asset-backed loans (e.g., gold or vehicle loans).

Deposit Handling

• Banks: Accept demand deposits (withdrawable anytime, like savings or current accounts) and use them for lending.
• NBFCs: Accept only time-bound deposits (e.g., fixed deposits) and cannot offer demand deposit accounts. New RBI rules effective January 1, 2025, require  NBFCs to notify depositors of maturity details at least 14 days in advance, down from two months, enhancing transparency.

Foreign Investment

• Banks: Limited to 74% foreign direct investment (FDI) for private banks and 20% for public sector banks, with up to 49% under the automatic route and above requiring government approval (ICICI Bank).
• NBFCs: Can accept up to 100% FDI under the automatic route, making them attractive for global investors (Nexdigm).

Payment Systems

• Banks: Integral to payment and settlement systems, supporting transactions via NEFT, RTGS, and UPI.
• NBFCs: Do not participate in payment ecosystems, focusing solely on lending and investment services.

Reserve Requirements

• Banks: Must maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as mandated by the RBI to ensure liquidity and stability.
• NBFCs: Exempt from CRR and SLR but required to maintain a Liquidity Coverage Ratio (LCR) for non-deposit-taking NBFCs with assets of ₹10,000 crore and above, and all deposit-taking NBFCs, to manage short-term liquidity risks (Financial Express).

Deposit Insurance

• Banks: Deposits are insured up to ₹5 lakh per depositor per bank by the Deposit Insurance and Credit Guarantee Corporation (DICGC), providing a safety net (ClearTax).
• NBFCs: Lack deposit insurance, posing a higher risk to depositors, though they often offer higher interest rates to compensate.

Credit Creation

• Banks: Can create credit through fractional reserve banking, effectively increasing the money supply by lending out a portion of deposits.
• NBFCs: Cannot create credit, relying solely on existing funds or borrowings for lending activities.

Transactional Services

• Banks: Offer everyday services like cash withdrawals, debit cards, and online payments, making them essential for daily financial transactions.
• NBFCs: Do not provide transactional banking services, focusing instead on specialized financial products

Comparison Table: Banks vs. NBFCs

Should You Choose a Bank or an NBFC?

It depends on your needs:

• Go with a Bank if you need a savings account, want lower interest loans, or need secure deposits.
• Go with an NBFC if you need quicker loan approvals, flexible eligibility, or personalized financial services.

NBFCs are especially useful for people who don’t meet the strict requirements of traditional banks, like small business owners, self-employed individuals, or those with low credit scores.

Why NBFCs are Growing in India?

The financial sector in India continues to evolve, with NBFCs playing a pivotal role in financial inclusion. According to CRISIL Ratings, NBFC asset growth is projected to slow to 15-17% year-on-year in FY25 and FY26, down from 23% in FY24, due to tighter regulations and reduced bank funding. Despite this, growth remains above the decadal average of 14%, driven by strong demand in home and vehicle loans, which account for about 45% of NBFC assets under management.

The RBI’s Scale-Based Regulation (SBR) framework, introduced in 2023, categorizes NBFCs into four layers: Base, Middle, Upper, and Top based on their size, activities, and systemic risk. Larger NBFCs face stricter regulations, including the requirement to maintain a Liquidity Coverage Ratio (LCR) to ensure resilience against liquidity crises (Financial Express). This framework enhances oversight while allowing smaller NBFCs operational flexibility.

Additionally, new RBI rules effective January 1, 2025, have updated fixed deposit regulations for NBFCs, reducing the maturity notification period from two months to 14 days and introducing guidelines for premature withdrawals and nominations (Business Standard). These changes aim to improve transparency and customer experience.

The Banking Laws (Amendment) Act, 2025, passed in April 2025, introduced reforms like allowing up to four nominees for bank accounts and extending cooperative bank directors’ tenure, but these primarily affect banks and do not significantly alter the bank-NBFC distinction.

Frequently Asked Questions (FAQs)

Q. Why Aren’t NBFCs Considered Banks?

- NBFCs operate under the Companies Act and lack a banking license, prohibiting them from accepting demand deposits or participating in payment systems, unlike banks, which are licensed under the Banking Regulation Act.

Q. How Do Banks Differ From Other Financial Institutions?

- Banks uniquely accept demand deposits and facilitate daily transactions like payments and withdrawals, distinguishing them from NBFCs and other entities like mutual funds or insurance companies.

Q. What Makes NBFCs Different in Lending?

- NBFCs often provide faster loan approvals, sometimes within 24 hours, and cater to specific needs like gold loans or equipment financing, offering more flexibility than banks’ broader lending scope.

Q. Are Deposits in NBFCs Safe?

- NBFC deposits carry higher risk as they lack insurance coverage from DICGC, unlike bank deposits, which are insured up to ₹5 lakh. However, NBFCs may offer higher interest rates to attract depositors.

Q. How Have Recent Regulations Impacted NBFCs?

- The RBI’s SBR framework and new fixed deposit rules in 2025 have increased regulatory oversight for larger NBFCs, requiring them to maintain LCR and adhere to stricter governance standards, aligning their operations closer to banks in terms of stability.

Conclusion

Banks and NBFCs are vital to India’s financial ecosystem, each serving distinct purposes. Banks are ideal for everyday banking needs, deposits, withdrawals, and payments, while NBFCs excel in specialized services like quick loans (Personal Loan, Home Loan, and Business Loan) and investment options (Fixed Deposits, Digital Gold, and Unlisted Shares), particularly for underserved segments. In 2025, with evolving regulations like the SBR framework and new deposit rules, NBFCs continue to bridge financial inclusion gaps despite a projected growth slowdown. Understanding these differences empowers you to choose the right institution for your financial goals, whether it’s a secure savings account with a bank or a tailored loan from an NBFC.
 

Author: Abhik Das

Abhik Das is a versatile content writer with over 5 years of experience crafting engaging and informative content across diverse industries. His expertise spans the fields of ed-tech, pharmaceuticals, organic food, travel, sports, and finance.

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