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written by | August 23, 2022

What is the Difference Between Bank and NBFC?

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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.

Also read: What is an Accounting Transaction? Example & Types of Accounting Transaction

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. 

Points of Difference

Banks

NBFCs

  1. Licensing and Regulation

Banks are licensed financial institutions regulated by the government under the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949.

NBFCs are not authorised; they have licensed financial institutions. They are formed per the Companies Act and regulated by the Reserve Bank of India Act of 1934.

  1. Types of Services

Banks provide services in loan advancements, guarantees, credit card facilities, remittance of funds, cheque payments, etc.

NBFCs provide services such as savings and investment plans, stocks, insurance facilities, mutual funds, etc..

  1. Deposit Function,

The primary function of banks’ business is accepting deposits and offering loans.

NBFCs deal in deposits for the process of securitisation.

  1. Acceptance of Demand Deposits

Banks accept deposits repayable on demand.

NBFCs are not permitted to accept demand deposits.

  1. Extend Foreign Investment

Banks are eligible for foreign investments up to 74%.

NBFCs are allowed for foreign investments up to a maximum of 100%.

  1. 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.

  1. Maintenance of CRR and SLR

Banks must mandatorily maintain ratios like Cash Reserve Ratios (CRR) and Statutory Liquidity Ratios (SLR).

CRR and SLR are not required in the case of NBFCs.

  1. Facility of DICGC

Banks' Facility has deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC).

NBFCs have no such access to this kind of facility.

  1. Creation of Credits

Banks are involved in creating credits.

Credit creation is impossible for NBFCs.

  1. Provision of Transactional Services

Banks usually provide transactional services like deposits, cash withdrawals, checks, debit card payments, or even online payments.

NBFCs do not provide such types of transactional services.

Also read: Accounting Period - Definition, Types & How Does an Accounting Period Work?

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. 
Follow Khatabook to learn more about the business tips, latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and Accounting.

FAQs

Q: Is NBFC a private company?

Ans:

All NBFCs need not necessarily only be private companies. They can be formed and registered as private and public limited companies.

Q: Can NBFC provide a loan?

Ans:

Yes. NBFCs offer services of unsecured loans like

  • Bill Discounting
  • Cash Credit,
  • Overdraft

Q: Why are NBFCs not banks?

Ans:

NBFCs are not considered banks because they are formed and registered under the Companies Act of 2013 and perform financial functions without a banking licence.

Q: What is the difference between banks and financial institutions?

Ans:

The primary characteristic that differentiates banks from other financial institutions is that banks’ function is the acceptance of deposits for savings and demand deposits.

Q: In what way is an NBFC better than a bank?

Ans:

The provision of services by NBFCs regarding the loan is seamless, with the approval of an application within just 24 hours.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.