Difference Between Banking and Non-Banking Financial Institutions

All the necessary facets of society are served by financial institutions. Not only do they affect people, but also businesses and governments. Banks and NBFCs are the most renowned financial institutions for every financial necessity. But how do they differ or resemble one another?

A bank and Non-Banking Financial Company (NBFC) are two unique financial institutions with very different business models, operations, and regulatory requirements. Where a bank is an authorised government financial institution, an NBFC is a company that performs similar banking operations without a granted banking licence.

Banks also take deposits and use loans to lend money to the parties. An NBFC offers small firms and individuals business loans and lines of credit, in contrast to banks, which accept deposits from customers and give loans and other forms of credit.

Because so many diverse segments of society require various forms of financial assistance, another financial institution must exist as a non-banking financial company. So, in this blog post, we will look into the details of what and how each of these two institutions functions by mentioning the difference between banking and non-banking financial institutions. 

Do you know? In India, presently, there are 27 public sector banks and 19 nationalised banks.

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What is a Bank?

Banks are financial institutions that deposit money from depositors and lend it out at interest to borrowers. The world's most common type of bank is the commercial bank, which offers cheque facilities, savings accounts facilities, current account facilities, and lending opportunities to people who want to borrow money for mortgages or small business loans. Banks are heavily regulated by the government and must adhere to strict rules regarding their lending activities.

According to the Banking Companies (Regulations) Act of India, 1949, Banking is defined as accepting public money deposits for lending and investment which are otherwise repayable on demand and withdrawable by cheque or draft.

In other words, a bank is an institution that performs various financial functions right from accepting deposits to creating credit. It is an authorised organisation licensed by the government to carry out the financial needs of the society and the economy as a whole. A few of the fundamental functions that banks perform are:

• Receiving demand or time deposits
• Discounting notes
• Payment of interest
• Providing loans
• Investment in securities
• Collection of cheques, drafts, and notes
• Issuing drafts

Since banks are considered highly regulated, their presence in the economy bears crucial significance due to their maintenance of financial stabilisation in the country.

What is an NBFC?

NBFCs are Non-Banking Financial Companies that offer financial services to the public. They are regulated by the Reserve Bank of India (RBI) and must be registered with the RBI under the Companies Act of 1956. The RBI licences NBFCs to function in a specific manner.

Usually, NBFCs are not permitted to create bank accounts for the public and may only take deposits in the form of fixed deposits and recurring deposits. In addition, they are not allowed to issue loans to the public, except for loans against gold or to finance vehicles or certain kinds of equipment. Furthermore, they are also obligated to pay interest on deposits received from the public.

Difference Between Banking & Non-Banking Financial Institutions

Finally, we have arrived at a section where we can discuss the detailed key factors that make banks differ from NBFCs. Both provide financial services, but they function in many different ways. 

This section describes the key differences between banks and NBFC. You can make an informed decision about the type of financial institution you need to work with to achieve your personal and business goals.

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Let's look at the difference between banking and Non-Banking Financial Companies in terms of their functions as financial institutions.

1. In India, banks are licensed financial institutions that the government regulates under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. NBFCs are Non-Banking Financial Companies formed per provisions of the Companies Act of 1956 or the Companies Act of 2013 and are usually regulated by the Reserve Bank of India Act of 1934.

2. Banks provide varied kinds of services to their customers. Such services include loan advancements, guarantees, credit card facilities, remittance of funds, cheque payments, etc. Whereas NBFCs are service providers in terms of savings and investment plans, stocks, insurance facilities, mutual funds, etc. 

3. While banks' primary business is accepting deposits and offering loans, NBFCs, unlike banks, get deposits through the process of securitisation.  

4. Banks accept deposits that are repayable on demand, whereas NBFCs are not permitted to enter into the business of accepting such deposits.

5. Where banks are eligible for foreign investments up to 74%, NBFCs are allowed for foreign investments up to 100%.

6. Banks' primary function involves and forms part of the payment and settlement cycle. In contrast, Non-Banking Financial Companies do not form part of any such payment and settlement cycle.

7. Banks must mandatorily maintain ratios like Cash Reserve Ratios (CRR) and Statutory Liquidity Ratios (SLR). Whereas NBFCs don't need to maintain such ratios.

8. Banks can avail of the deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC), whereas NBFCs have no access to this facility.

9. Banks can involve themselves in creating credits. However, creating credit is impossible for NBFCs. 

10. While banks provide transactional services like deposits, cash withdrawals, checks, debit card payments, or even online payments, these services are not offered by Non-Banking Financial Companies.

NBFC Vs. Bank – Comparison Table

NBFCs are not banks, even though this is a common misconception. Here is a chart summarising the main points separating a bank from an NBFC. 

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Conclusion

To conclude, banks and Non-Banking Financial Companies (NBFCs) are financial service providers, but they operate differently. Where banks primarily accept and offer loans, NBFCs' prime focus is to serve lending functions to businesses. In recent years, NBFCs have also covered the financial needs of individual customers. 

Moreover, banks mainly trade for stocks and shares while providing financial advice to their clients. On the other hand, NBFCs provide financial services like investment, insurance, securities, and many more. Additionally, banks are thoroughly regulated by the government's many rules and regulations. In the case of NBFCs, they follow the rules set by the Reserve Bank of India. We hope you liked the article on bank and NBFC differences. 
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