NBFC License vs. Bank License: Understanding the Differences and Similarities

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NBFC License vs. Bank License: Understanding the Differences and Similarities

In a financial system, there are two main intermediaries first is bank and second is NBFC. The traditional institutions that accept public deposits and give them back as a loan to the general public are known as banks. They are backed by the government and other big companies. So, to operate the business a bank license is required.

NBFC on the other hand, provides services to those people who can’t access banks and other big financial institutions. An NBFC registration is compulsory to set up a business, although it doesn’t require a bank license. So, before starting a business, you must be aware of all the functions of banks and NBFC to choose the right option. So, here in this article, below we shared the difference between NBFC License vs. Bank License. 

What is NBFC License?

NBFC full form is a Non-Banking Financial Company. These companies are involved in financial activities such as providing loans, investment, marketplace lending, or information service providers or for any other business purpose specified in Section 45-1A of the RBI Act 1934 & Companies Act, 2013.

The NBFCs do not require any cooperative or commercial bank license but should follow the rules and regulations given by the Reserve Bank of India, in a timely manner. There are two types of categories of NBFC which are as follows:

1) Deposit-taking NBFC

Must follow the guidelines set by RBI about receiving the deposits from general public. Based on the size of the deposit, it further divides into three groups:

1. Systematically Important Deposit-taking NBFCs - Accept Rs. 50 crore or more and must have an asset size of Rs. 500 crore more.
2. Non-Systematically Important Deposit-taking NBFCs - Accepts deposits of Rs. 50 crore and must have an asset size under Rs. 500 crore.
3. Residuary Non-Banking Companies - These are NBFCs that accept deposits and make investments in approved securities.

2) Non-Deposit-taking NBFC

The business must have a minimum Net Owned Fund (NOF) of minimum Rs. 2 crore. The total capital given by shareholders, including free reserves, and other instruments is known as NOF. For the registration of NBFC, so that it operates, the RBI has additionally made some laws and regulations. 

What is a Bank License?

In most legal jurisdictions, a bank must obtain a license to operate a banking business. Until the bank holds a license, cannot mention the words like bank, insurance, national, etc. words. 

The banks function by receiving deposits from the public and further giving them as a loan to earn interest. The Central Bank Government and RBI check the laws and regulations of the banking sector. 

For safe and secure money deposits, the public chooses banks as the best option. But mainly you will see the major part of banks in urban areas. Based on the banking regulations, the jurisdiction allows these three types of banking licenses:

•  Full banking licenses: These include general banking activities, such as taking deposits and providing loans to the general public.
• International banking licences: The license does not prohibit any local business activities.
• Non-banking Financial Institution (NBFI): It is also an institution that provides financial services but it complies with fewer regulations compared to a full banking licence.

Categories of Banks

The banks are divided into three categories and these are as follows:

• Public Sector Bank: in this category, the government owns the majority of shares. State Bank of India and Punjab National Bank are some examples of public sector banks.
• Private Sector Bank: In this category, individual investors hold the majority of stocks rather than the government. ICICI Bank, HDFC Bank, and Axis Bank are some of the examples of private sector banks. 
• Foreign Banks: the foreign bank is abide by the laws of its home country and the host country. The parent bank's capital decides how much money the bank will lend.

Difference Between NBFC License and Bank License

The main difference between an NBFC license and a Bank license is that Bank is an authorised government financial institution, that performs financial activities by having a license only. On the other hand, an NBFC performs financial operations without a banking license. The other differences between an NBFC license and a bank license are as follows:

Conclusion

So, the above are some differences between NBFC licenses and Bank licenses. On one side where NBFC focused on providing credit to underprivileged sections of society. On the other hand, Bank has strict licensing requirements. 

After knowing the functions of both institutions, individuals and businesses can follow the right approach to choose the right institute as per their financial needs.

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