Banks and NBFCs (Non-Banking Financial Companies) are the key financial intermediaries and offer almost similar services to customers. The basic difference between banks & NBFCs is that NBFC cannot issue cheques and demand drafts like banks. Banks take part in country’s payment mechanism whereas Non-Banking Financial Companies are not involved in such transactions.
What is an NBFC?
“A non-bank financial company (NBFC) is a company registered under the Companies Act of 1956, carrying out activities of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by the government or a local authority or other negotiable securities of a similar nature, of leasing, hire purchase, insurance, chit, but does not include any institution primarily engaged in farming, industrial activity, the purchase or sale of goods (other than securities) or the provision of services and the sale/purchase/construction of the real estate. – RBI.
What is a Bank?
Banks are the financial institution, authorised by the government to conduct banking activity like accepting deposits, granting credit, managing withdrawals pay interest, clearing cheques and providing general utility services to the customers. Banks are the apex organisation, which dominates the entire financial system of the country. It acts as a financial intermediary, between the depositors and borrowers that ensures smooth functioning of the economy.
Difference between Banks and NBFCs
Here are the differences between Banks and NBFCs:
- Banks are the government authorized financial intermediary that aims at providing banking services to the general people. Whereas NBFCs provides banking services to people without carrying a bank license.
- It is mandatory for banks to maintain reserve ratios like CRR or SLR. Whereas in the case of NBFC it is not required to maintain reserve ratios.
- An NBFC is incorporated under the Companies Act whereas a bank is registered under the Banking Regulation Act, 1949.
- NBFCs are not allowed to accept deposits which are repayable on demand whereas banks accept demand deposits.
- In NBFC, foreign Investments up to 100% is allowed. Whereas in the case of private sector banks they are eligible for foreign investment, but which would be no more than 74%.
- Banks are an integral part of the payment and settlement cycle while NBFC is not a part of this system.
- Deposit insurance facility is allowed to the depositors by Deposit Insurance and Credit Guarantee Corporation (DICGC). In the case of NBFC, this type of facility shall not be available.
- Banks can provide transaction services to its customers such as providing overdraft facility, issue of traveller’s cheque, transfer of funds, etc. Whereas these type of services cannot be provided by NBFC.
- Banks can create credit whereas in case of NBFC they are not involved in the creation of credit.
Bank vs. NBFC
The differences are not only in the functioning of a bank and NBFC. The most significant ones are from the angle of the regulatory bodies and the extent of financial regulation by the RBI on both.
1. Fixed deposits of NBFC vs. Bank
.Though both banks and NBFCs accept fixed deposits; however, there are some differences between them both. For example, while fixed deposits by NBFCs are generally rated by the rating agencies in the country. But fixed deposits of banks are not rated by any rating agencies. Another point of difference between their fixed deposits is insurance. Fixed deposits of banks are insured, while those with NBFCs are not.
In fact, for default by a bank, the Deposit Insurance and Credit Guarantee Corporation of India pays the insured amount on a bank deposit, not exceeding Rs. 1 lakh. But in case an NBFC defaults on its payments, you would lose the principal, as well as the interest amount. This is why experts advise opting for highly rated safe fixed deposits only.
Also, another thing worth noting is that deposits with an NBFC earn a higher rate of interest as compared to deposits with a bank.
A bank is registered under the Banking Regulation Act, 1949. Whereas an NBFC is incorporated under the Indian Companies Act, either 1956 or 2013, and has to also be registered with RBI.
Banks are under strict regulations of the RBI as they deal with public deposits. The NBFCs also have to comply with RBI’s strict provisions but the extent of control is less than the banks.
Though in recent times, the regulatory norms are being converged, reducing the extent of this difference. Now, the regulations are converging, due to the fallouts of major NBFCs
3. Deposit Acceptance & Interest
Banks are authorized to provide almost all financial services and products. They can accept demand deposits (deposits repayable on demand by customers have high liquidity and are considered as good as cash in hand). NBFCs are not entitled to accept demand deposits unless specific authorization is received by RBI.
The NBFCs can provide only certain financial functions applied to them. There are some NBFCs allowed to accept deposits (other types of deposits), but they are very stringently controlled by the RBI. The NBFCs are authorized to accept/renew public deposits for a minimum period of 12 months and a maximum of 60 months. There are less than 300 deposit-taking NBFCs out of over 12000 registered NBFCs in India. Regarding interest rate, the maximum interest an NBFC can offer is 12.5%. The interest may be paid or compounded at least monthly intervals. Duration of less than a month is not allowed. The repayment of deposits in NBFCs is not guaranteed by RBI, whereas the deposits in banks are.
In certain areas, NBFCs have an edge over the banks in terms of the convenience and flexibility they offer on the loan and advances. You are not hassled with lengthy paperwork when you apply for a deposit or loan with NBFC vs a bank. Also, FinTech NBFCs allow you to take a loan by applying for it online, comfortably from your home or office. Through this online facility is available to banks also. Apart from flexibility for applying, a loan of up to Rs.10 crore for a tenor of 25 years can be availed of too. With most leading NBFCs, you can get your loan approved within 48 hours of your loan application.
5. Eligibility Criteria
Your repayment capacity, income, credit rating, the place of residence and work, etc. are the basic factors on which the approval of your loan application is based. These are the deciding parameters for both banks and NBFCs. However, each financial institution has its own loan eligibility criteria. These conditions are rather simple in the case of most NBFCs. And you can apply with ease. The same may not be true for banks. For example, you may not qualify for any loan with banks due to a low credit score. But some NBFCs may disburse a loan to you, charging a higher interest rate.
Conclusion of NBFC vs. Bank
NBFC license is mainly provided to finance the poor section of the society and for their economic development. Whereas the banks are established by the government to receive deposits and grant credit to the public. The regulations licensing a bank are more stringent than that of an NBFC. Moreover, a bank cannot operate any other business activity than banking, but an NBFC can operate such business.
NBFCs, though incorporated with the Companies Act, are under strict regulations by the RBI. Therefore, rest assured, your deposits, with a high-rated firm, are safer than before.
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