Banks and non-banking financial institutions are the most vital financial institutions that not only fulfill the financial needs of individuals and businesses but also have a significant impact on the economy.
If you have always wondered how non-banking financial companies differ from banks, know that you aren’t alone. NBFCs are way different than a bank in terms of business models, regulatory requirements, and operations, to name a few.
As the name implies, a non-banking financial company offers financial services; however, they do not have a banking license. A bank, on the other hand, has a banking license which also allows it to accept deposits.
Authorized by the government to conduct banking operations and activities such as granting credit, accepting deposits, cash withdrawals, paying interest, issuing checkbooks, and cheque-clearing services, to name a few. Banks also act as an intermediary between borrowers.
Banks can be the public sector, private sector, or foreign financial institutions making loans, facilitating the mobilization of deposits, and offering public utility services.
There are a plethora of differences between NBFCs and banks. Let’s quickly glance through those differences.
1. Licensing & regulation
Banks are licensed financial intermediaries regulated by the Indian government under the RBI Act 1934 and the Banking Regulation Act 1949.
On the other hand, NBFCs are formed under the Companies Act and regulated by the Reserve Bank of India Act of 1934.
2. Services offered
NBFC and bank differences lie not only in formation, regulation, and licensing but also in operations. They offer similar financial services; however, non-banking financial companies cannot accept repayable-on-demand deposits. NBFCs offer services such as savings & investment plans, mutual funds, insurance, and stocks, to name a few. Banks are allowed to accept demand deposits.
Banks offer loan advancements, credit card facilities, cheque payments, and remittances of funds.
3. Extend foreign investment & deposit function
Where banks are allowed to extend foreign investments up to 74%, non-banking financial institutions can take foreign investments up to 100%.
Speaking of deposits, banks’ primary function is to accept deposits and offer loans, while non-banking financial companies deal in deposits only for securitization purposes.
4. CSR and SLR maintenance
It is mandatory for banks to maintain Cash Reserve Ratio (CSR) and Statutory Liquidity Ratio (SLR), which is not the case with an NBFC as they are not bound to do so.
5. Credit creation
One of the major differences between NBFCs and banks differences is that banks are eligible to create credits while NBFCs are not.
6. Transactional services
Banks are eligible for transactional services such as online payments, debit card payments, deposits, and cash withdrawals. Unlike banks, NBFCs are not allowed to provide these transactional services.
7. Payment and settlement cycle
NBFCs do not play any role in payment and settlement cycles, while banks are a part of it.
8. DICGC coverage
While all commercial banks, inclusive of local area banks, regional banks, national banks, and even foreign banks functioning in the country, have DICGC (Deposit Insurance and Credit Guarantee) coverage. Unlike commercial banks, NBFCs are not insured by DICGC.
The Bottom Line:
It can be concluded that banks and NBFCs are crucial financial institutions that work pretty differently. They offer different services and have different compliance needs. Banks are engaged in a wide array of services, while NBFCs mainly serve lending functions to businesses and customers.
If you need more information about NBFC formation, compliance, takeover, or foreign investment in the NBFC sector in India, NBFC Advisory has you covered.