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
|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.
Key Differences Between NBFC and Bank
The difference between NBFC and bank can be drawn clearly on the following grounds:
- A government authorised financial intermediary that aims at providing banking services to the general public is called the bank. An NBFC is a company that provides banking services to people without holding a bank license.
- An NBFC is incorporated under the Indian Companies Act, 1956 whereas a bank is registered under Banking Regulation Act, 1949.
- NBFC is not allowed to accept such deposits which are repayable on demand. Unlike banks, which accepts demand deposits.
- Foreign Investments up to 100% is allowed in NBFC. On the other hand, only banks of the private sector are eligible for foreign investment, and that would be not more than 74%.
- Banks are an integral part of payment and settlement cycle while NBFC, is not a part of the system.
- It is mandatory for bank maintain reserve ratios like CRR or SLR. As opposed to NBFC, which does not require to maintain reserve ratios.
- The deposit insurance facility is allowed to the depositors of banks by Deposit Insurance and Credit Guarantee Corporation (DICGC). Such facility is unavailable in the case of NBFC.
- Banks create credit, whereas NBFC is not involved in the creation of credit.
- Banks provide transaction services to the customers, such as providing overdraft facility, the issue of traveller’s cheque, transfer of funds, etc. Such services are not provided by NBFC.
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.