There are mainly two types of financial intermediaries, namely banks and NBFCs (Non-Banking Financial Companies), which provide almost identical services to their customers. NBFCs are not able to issue checks and demand drafts as banks can.
That's the main difference between bank and nbfc. Non-Banking Financial Companies are not involved in the country's payment mechanism whereas banks take part in such transactions.
There are both public and private NBFC services in the market. These NBFC services are provided as a complement to banks to help people receive finance.
Banks cannot cater to all sections of society alone since finance is a basic necessity for every individual and business.
In addition to their role in supporting the development of infrastructure, transport, and MSMEs, NBFCs have also played a significant role in supporting MSMEs.
By providing additional financial support, it created additional opportunities for economically weaker sections in the country to gain employment and work.
Non-banking finance companies were seen as an alternative financing and liquidity source for them.
Difference between Banks and NBFCs
1. Foreign investment
It is important to note that banks are permitted to make financial investments of up to 74 percent of their assets, but NBFCs can make investments of up to 100 percent, which is a much higher percentage.
2. Authorization
It is the level of authorization of NBFCs and Banks that is the first and major difference between both of them. To provide banking services to the general public, NBFCs are not required to maintain a banking licence.
A bank, on the other hand, is authorised by the government and its primary objective is to serve the public interest.
3. Deposit on request
Demand deposits, referred to as DDs, are funds from which an individual can withdraw money from a financial institution at any time, without being restricted to time constraints.
No NBFC understands the value of DDs for financial transactions. In spite of the fact that DDs are widely used by banks in order to make payments.
4. Constitution
Companies Act of 1956 was the basis for the creation of the NBFCs, as was mentioned above. Banking Regulation Act of 1949 was the law that regulated the banks.
As a consequence, businesses have different rules and regulations for the means of delivering services.
5. Maintenance of the reserve ratio
As per the regulation set forth by the central bank of most OECD countries, the reserve ratio is the proportion of a depositor's balance that should be held by the cash bank in order to ensure continuity of service.
In order for NBFCs to carry on with their business operations, they do not need to maintain a reserve ratio, but banks are required to maintain it, as it influences the quantity of money in a country over the course of a certain period of time.
6. Deposit insurance system
Deposit insurance, which is offered by deposit insurance companies and credit guarantee companies, cannot be accessed by non-bank financial companies, however banks can certainly use this structure as a way to protect their clients' funds.
7. Payment and balance system
NBFCs differ from banks, among other things, in that they operate as part of the settlement system, something which NBFCs do not do. This is one of the primary ways that NBFCs differ from banks.
An Overview on NBFCs
This company is a Non-Banking Financial Company going by the name of an Notwithstanding Credit Institution.
The company has been registered under the Companies Act, 1956 and has been regulated by the Central Bank, that is, the Reserve Bank of India pursuant to its RBI Act, 1934.
These companies are not banks, but they are doing lending and other business activities as equivalent to those of banks like extending advances and loans, establishing credit facilities, establishing savings and investment products, trading on the money market, managing stock portfolios, transferring money, and so on.
This company engages in a number of activities such as home loan financing, mortgage financing, leasing, infrastructure financing, venture capital financing, housing financing, etc.
As an NBFC, it accepts deposits, but under certain conditions, only term deposits and deposits that can be repaid on demand are accepted.
These companies began to appear in India in the mid-1980's. A couple of examples of notable NBFCs are Sundaram Finance, Kotak Mahindra Finance, SBI Factors, and ICICI Ventures.
The NBFCs are classified into three categories, which include:
Asset Companies.
Investment Companies.
Loan Companies.
An Overview on Banks
A bank is one of the most recognized financial institutions, which are authorized by the government to carry out a variety of financial activities, including accepting deposits from customers, granting credits, handling withdrawals, paying interest on credit, clearing checks, and providing general utility services.
The banks are the largest and most influential financial institutions in a country. They dominate the entire financial system of a country.
This financial intermediary performs a key role in ensuring smooth operations of the economy by serving as an intermediary between depositors and borrowers.
Depending on the type of bank, a public sector bank, private sector bank or foreign bank can be in operation.
In addition to the services provided by them, they are responsible for lending, creating credit, mobilising deposits, ensuring a safe and efficient transfer of money, and providing public utility services.
Commercial banks are owned and operated by investors and they are owned with the objective of making money for the shareholders.
Is it necessary that every NBFC should be registered with RBI?
As per the RBI Act of 1934, part 45IA of the act provides that no non-banking financial company may commence its operations or carry on an operation as a non-banking financial institution without having obtained a statement of registration from a bank, as well as acquiring Net Owned Funds amounting to at least 25 lakhs (since April 1999, this figure increased to 2 crore).
Among the various powers that the Bank has been given, in order to avoid dual regulation, certain categories of NBFCs which are regulated by other regulatory agencies are exempt from the requirement of registration with the RBI, such as Venture Capital Funds, Merchant Banking companies, Stock Brokerage Companies registered with the SEBI, among others.
Conclusion
An NBFC is a lender that provides credit primarily to the poorer sections of the society, whereas a bank is a lending institution whose responsibility is to extend credit and accept deposits from the public.
The regulations governing the licensing of a bank are more stringent than those governing an NBFC. An NBFC, on the other hand, can operate any type of business that its customer wants, whereas a bank can only operate the banking business.
Considering the differences between these institutions, it is of vital importance to determine which institution is more suitable for you. Choosing the right institution will help you make better financial decisions based on your financial goals.
With the rapidly changing nature of the market, it is crucial to choose the right institution, which is one of the most important decisions.
Frequently Asked Questions
Q1. Which is better bank or NBFC?
In contrast to demand deposits, NBFCs can invest and lend, but they cannot accept demand deposits.
The truth of the matter is that NBFCs have fewer rules and regulations compared to banks but borrowers prefer them over banks because banks have so many rules and regulations.
Moreover, the approval or sanctioning of a loan takes a lot of time on their part.
Q2. What is the difference between bank and financial institutions?
There is also one further difference between banks and other financial institutions - banks are able to accept deposits into savings and demand deposit accounts, while other financial institutions are not able to do so due to their core competence.
Q3. Why NBFC is not a bank?
Nonbank financial businesses (NBFCs), also known nonbank financial institution (NBFIs), offer certain banking-like services without a bank license.
These NBFCs don't have to comply with the banking regulations or be subject to oversight by state and federal authorities.
Q4. Is NBFC a banking company?
Nonbank financial companies (NBFCs), also referred to as nonbank financial institution (NBFIs), are institutions that offer a variety of banking services, but don't have a banking license.