Bank vs NBFC: Know the Difference

November 20, 2024
Registrationwala

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Bank vs NBFC: Know the Difference

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Bank vs NBFC: Know the Difference

November 20, 2024

Registrationwala

In India, two types of institutions are famous for providing financial services i.e., Non-Banking Financial Companies (NBFCs) and Banks. Both these institutions serve the various financial needs of their customers. While banks have been around since the 1770s (after establishment of Bank of Hindustan) in India, NBFCs were introduced in the country in the 1960s. Banks are regarded as a traditional way of investing money and many individuals and entities prefer to approach banks because of their credibility and the fact that they are backed by our government.

On the other hand, NBFCs are a comparatively new concept as compared to traditional banks. These institutions provide lending services to customers without heavy paperwork and security. They cover people from lower financial backgrounds. Many people who cannot meet their funding requirements through banks approach NBFCs.

In this article titled “Major Differences Between a Bank and NBFC”, we have explained the difference between banking and non banking institutions taking into account various parameters. Enjoy reading!

What are NBFCs?

Non-Banking Financial Company, simply known as an NBFC, is a company registered under the Companies Act 2013. The primary business activities of an NBFC are providing loans and advances, acquisition of shares/ stocks/ bonds/ debentures/ securities issued by the Government or local authorities or other marketable securities. It can conduct different financial activities, only if it has an NBFC license.

The business can include leasing, hire-purchase, insurance business, and chit business. But it should not include any institution whose principal business is in agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/ purchase/ construction of immovable property.

However, a Non-Banking Financial Institution (NBFC) receives any deposit under any scheme or arrangement in one lump sum or installments by way of contributions or in any other way, the company is known as a non-banking financial company.

What are Banks?

Banks are financial institutions that accept deposits from customers for different accounts such as current accounts, savings accounts, joint accounts, etc. In return for these deposits, the bank provides some rate of interest on the amount as per the type of account chosen by the customers. The banks have two major types - private banks and public banks. Having a banking license is important to start providing financial services.

However, the rules for these banks are set by the Reserve Bank of India (RBI). However, these banks must follow the rules and regulations set by RBI to avoid any penalty. The Banking Companies Act of India, 1949 explains banking as accepting public money deposits for lending and investment which are then repaid on demand and withdrawn by cheque or draft.

So, the banks are the institutions that ensure that the public financial needs are fulfilled through different products and services. Below are some essential services offered by the banks are as follows:

Receiving demand or time deposits
Discounting notes
Payment of interest
Providing loans
Investment in securities
Collection of cheques, drafts, and notes
Issuing drafts

Difference Between NBFC vs Bank

The table below shows major difference between NBFC vs Bank:

NBFCs	Banks
The NBFCs are financial institutions regulated under the Companies Act 1956.	The banks are regulated by the government under the RBI Act, of 1934 and the Banking Regulation Act, of 1949.
NBFCs provide services such as savings and investment plans, stock, insurance facilities, mutual funds, etc.	Banks provide services in accepting deposits, loan advancements, guarantees, credit cards, remittance of funds, cheque payments, etc.
The NBFCs are allowed for foreign investment up to a maximum of 100%.	The foreign capital is allowed upto 74% for banks.
For NBFCs, there is no need to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratios (SLR).	The banks mandatorily maintain the CRR and SLR ratios.
There is no credit creation for NBFCs.	Banks are involved in creating credits.
NBFC does not provide transactional services.	The banks provide transactional services such as cash withdrawals, cheques, money transfers and now even online payments.
The NBFC cannot accept demand deposits.	The bank accepts deposits repayable on demand.
NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.	The banks can self-draw a cheque.
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.	The facility is available in the banks.

Conclusion

In this blog post, we explained nbfc and bank difference. Both banks and NBFCs are financial service providers, regulated by the Reserve Bank of India (RBI). However, the working models of these two are different. The primary function of banks is to accept deposits and grant loans in return for some security.

The NBFC also caters to the financial needs of customers and provides lending services. The eligibility of NBFC to provide loans is not complex as compared to the banks. NBFC does not require heavy paperwork to provide loans. The compliances of banks are strict as compared to NBFCs.

If you want to register an NBFC, then reach out to Registrationwala. We will help you to obtain an NBFC license so that you can start your very own Non Banking Financial Company in India.