NBCFs and Banks both act as financial intermediaries and offer fairly similar services. But, there are many points of difference. There are very stringent licensing regulations for banks as compared to NBFCs.
What is an NBFC?
Principal business activities of a Non- Banking Financial Company consist of lending or financial leasing or hire purchase, accepting deposit or acquisition of shares, stocks, bonds, etc. To initiate any business they are required to acquire a license from RBI and they are regulated by RBI.
Based on Liability, NBFC can be Deposit-taking or Non-deposit taking. NBFC can be of following categories:
- Loan Company
- Asset Finance Company
- Investment Company
What is a Bank?
Banks perform activities like granting credit, demand deposits and provide withdrawals, interest payment, cheque clearing and other general utility services to their customers.
They dominate the financial sector of the country and provide a link as a financial intermediary between borrowers and depositors.
Key Differences between NBFC and Bank
Now that we have separately analyzed the activities undertaken by both these institutions, let us analyze how NBFCs and banks differ in nature and their functionalities.
- NBFC is first incorporated as a company under the Indian Companies Act, 1956 and then apply for NBFC license from RBI, on the other hand bank is registered under Banking Regulation Act, 1949.
- Banks are government authorized financial intermediary which are chartered to receive deposits and grant credit to the public. However, NBFC is a company that provides banking services to smaller sections of the society without holding a bank license.
- Banks are authorized to accept demand deposits, but NBFCs are not authorized to accept deposits which are repayable on demand.
- As NBFCs are established as companies under Companies Act, 2013 they are allowed to accept up to 100% foreign investments. But, banks are can only accept foreign investments up to 74% of their total amount.
- Like a bank, NBFCs do not form an integral part of payment and settlement cycle in the country.
- RBI mandates the maintenance of reserve ratios like CRR or SLR by banks. NBFC have no such obligation.
- Deposit Insurance and Credit Guarantee Corporation (DICGC) provide deposit insurance facility to the depositors of banks. Such facility is unavailable in the case of NBFC.
- NBFC is not involved in credit creation like banks do for their customers.
- Banks provide services like overdraft facility, the issue of travellers cheque, transfer of funds, etc. Such services are not provided by NBFC.
- NBFCs are not allowed to issue cheques drawn on itself like banks can.