How are nbfcs different from banks

Difference Between NBFC and Bank

Banks and non-bank financial firms (NBFC) are important financial intermediaries, offering almost similar services to customers. The main difference between NBFC and Bank is that as opposed to Banks a NBFC do not issue any self-drawn checks or bills of exchange desire can.

Another key differentiator between the two is that while banks participate in the country's payment mechanism, financial firms outside the banking sector are not involved in such transactions.

Since finance is the basic requirement of individuals and companies, banks cannot serve all walks of life. It is for this reason that NBFC was created in both the public and private sectors to complement banks in providing finance to people.

Comparison table

Basis of comparisonNBFCBank
importanceAn NBFC is a company that provides banking services to individuals who do not have a banking license.The bank is a government-approved financial intermediary intended to provide banking services to the general public.
Registered underCompanies Act 1956Banking Supervision Act, 1949
Ask for a depositNot acceptedAccepted
Foreign investmentAllowed up to 100%Up to 74% allowed for private banks
Payment and settlement systemNot part of the system.An integral part of the system.
Maintaining the reserve ratioNot requiredmandatory
Deposit guarantee schemeNot availableAvailable
Credit creationNBFC does not create a credit note.Banks create credit.
Transaction servicesNot provided by NBFC.Provided by banks.

Definition of NBFC

NBFC expands to Non-Banking Financial Company, a company registered under the Companies Act of 1956 and regulated by the Central Bank i.e. the Reserve Bank of India under the RBI Act of 1934. These companies are not banks, they are however, engaged in credit and other activities similar to banking, such as loans and advances, credit facility, savings and investment products, money market trading, stockpile management, money transfer, etc.

It is pampered in the areas of hire purchase, leasing, infrastructure finance, venture capital finance, home finance, etc. An NBFC accepts deposits, but only term deposits and deposits that are refundable on demand will not be accepted by them.

In India, these companies came into being in the mid-1980s. Kotak Mahindra Finance, SBI Factors, Sundaram Finance, and ICICI Ventures are examples of popular NBFCs.

NBFC is divided into three categories:

  • Asset companies
  • Loan companies
  • Investment companies

Definition of bank

Banks are the financial institution authorized by the government to carry out banking activities, e.g. B. accepting deposits, granting credit, administering withdrawals, paying interest, clearing checks and providing general utility services to customers. Banks are the top organization that dominates the country's entire financial system. It acts as a financial intermediary between depositors and borrowers, ensuring the smooth functioning of the economy.

Banks can be public sector banks, private banks, or foreign banks. You are responsible for lending, creating credit, mobilizing deposits, transferring money securely and on time, and providing public utilities. A commercial bank is owned by the shareholder and operated for profit.

Key differences between NBFC and bank

The difference between NBFC and Bank can be clearly drawn for the following reasons:

  1. A government-authorized financial intermediary that aims to provide banking services to the general public is called a bank. An NBFC is a company that provides banking services to individuals who do not have a banking license.
  2. An NBFC was formed under the Indian Companies Act of 1956, while a bank is registered under the Banking Regulation Act of 1949.
  3. NBFC is not entitled to accept deposits that are to be repaid on request. Unlike banks that accept sight deposits.
  4. Foreign investment up to 100% is allowed in NBFC. On the other hand, only private sector banks are eligible for foreign investment, and that would be no more than 74%.
  5. Banks are an integral part of the payment and settlement cycle, while NBFC is not part of the system.
  6. It is imperative to comply with reserve ratios such as CRR or SLR. In contrast to NBFC, which does not require any reserve ratios.
  7. The Deposit Insurance Facility is granted to depositors by banks through the Deposit Insurance and Credit Guarantee Corporation (DICGC). Such a facility is not available in the case of NBFC.
  8. Banks create credit while NBFC is not involved in credit formation.
  9. Banks offer customers transaction services such as B. Overdraft facilities, traveler's checks, money transfers, etc. These services are not offered by NBFC.

Conclusion

NBFCs are formed primarily to lend to the poor, while banks are chartered by the government to raise deposits and lend to the public. A bank's licensing requirements are stricter than those of an NBFC. In addition, a bank cannot conduct any business other than banking, but an NBFC can conduct such business.