Difference Between NBFC and Bank

While banks and non-banking financial companies (NBFC) both are key financial intermediaries, that offer almost similar services to the customers. The major difference between NBFC and bank is that unlike banks, an NBFC cannot issue self-drawn cheques and demand drafts.

Another important point of distinction amidst these two is that while banks take part in the country’s payment mechanism, non-banking financial companies are not involved in such transactions.

As finance is the basic requirement of individual’s and business’s, banks alone cannot cater all the sections of the society. That is why NBFC came into being, both in public and private sector, to complement banks in providing finance to people.

Content: NBFC Vs Bank

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

Basis for Comparison	NBFC	Bank
Meaning	An NBFC is a company that provides banking services to people without holding a bank license.	Bank is a government authorized financial intermediary that aims at providing banking services to the general public.
Incorporated under	Companies Act 1956	Banking Regulation Act, 1949
Demand Deposit	Not Accepted	Accepted
Foreign Investment	Allowed up to 100%	Allowed up to 74% for private sector banks
Payment and Settlement system	Not a part of system.	Integral part of the system.
Maintenance of Reserve Ratios	Not required	Compulsory
Deposit insurance facility	Not available	Available
Credit creation	NBFC do not create credit.	Banks create credit.
Transaction services	Not provided by NBFC.	Provided by banks.

Definition of NBFC

NBFC expands to Non-Banking Financial Company is a company registered under the Companies Act, 1956 and regulated by the Central Bank i.e. Reserve Bank of India under RBI Act, 1934. These entities are not banks, but they are engaged in lending and other activities, akin to that of banks like providing loans and advances, credit facility, savings and investment products, trading in the money market, managing portfolios of stocks, transfer of money and so on.

It is indulged in the activities of hire purchasing, leasing, infrastructure finance, venture capital finance, housing finance, etc. An NBFC accepts deposits, but only term deposits and deposits repayable on demand are not accepted by it.

In India, these companies emerged in the mid-1980’s. Kotak Mahindra Finance, SBI Factors, Sundaram Finance, ICICI Ventures are examples of popular NBFC’s.

NBFC is divided into three categories, which are:

• Asset Companies
• Loan Companies
• Investment Companies

Definition of Bank

Banks are the financial institution, authorised by the government to conduct banking activity like accepting deposits, granting credit, managing withdrawals pay interest, clearing cheques and providing general utility services to the customers. Banks are the apex organisation, which dominates the entire financial system of the country. It acts as a financial intermediary, between the depositors and borrowers, that ensures smooth functioning of the economy.

Banks can be public sector banks, private sector banks or foreign banks. They are responsible for making loans, creating credit, mobilisation of deposits, safe and time bound transfer of money and providing public utility services. Ownership of a commercial bank lies with the shareholder and they are operated with the profit motive.

Conclusion

NBFC’s are mainly established to grant credit to the poor section of the society, whereas the banks are chartered by the government to receive deposits and grant credit to the public. The licensing regulations of a bank are more stringent than that of an NBFC. Moreover, a bank cannot operate any business other than the banking business, but an NBFC can operate such business.