Difference Between NBFC and Bank

Difference Between NBFC and Bank

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Rashmi
Rashmi Karan
Manager - Content
Updated on Jun 30, 2023 15:04 IST

Explore the key differences between banks and NBFCs and learn about their respective functions, such as deposit-taking, lending, payment services, and more

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Banks and NBFCs are the two crucial financial intermediaries in any financial system. Banks are the traditional types of entities that accept deposits from the public and provide loans to the public, while NBFCs offer various financial services to consumers without a banking license. Let us check out the major difference between NBFC and bank.

Tabular Comparison – Banks vs NBFCs in India

The main difference between NBFC and bank is that an NBFC is a financial company that performs banking operations without a banking licence, a bank is an authorized government financial institution,

Aspect Banks NBFCs
Regulatory Act Regulated by the RBI under the Banking Regulations Act, 1949 Regulated by the RBI under the Companies Act, 1956
Functions Offer a wide range of banking services. Engage in lending and investment activities.
Deposit Acceptance Accept deposits from the public. Do not accept demand deposits from the general public.
Issue of Cheques Issue and accept cheques. Cannot issue or accept cheques.
Banking License Require a banking license to operate. Do not require a banking license to operate.
Credit Creation Have the power to create credit through fractional reserve banking. Cannot create credit like banks.
Clearing House Membership Are members of the clearing house. No clearing house membership.
Government Guarantee Government insurance schemes may guarantee deposits. No government guarantee on deposits.
Access to RBI Facilities Access to various facilities the RBI provides, such as borrowing money and access to payment systems. No access to such facilities.
Priority Sector Lending Mandated to allocate a certain percentage of their lending to priority sectors as per regulatory requirements. Not mandated to follow priority sector lending norms.

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What are NBFCs?

Non-Banking Financial Companies (NBFCs) are financial institutions offering a wide range of financial services similar to banks. The main difference is that NBFCs are not licensed as full-fledged banks. 

NBFCs play a vital role in the financial system by offering various financial products and services to individuals, businesses, and other entities.

Unlike traditional banks, NBFCs cannot accept demand deposits from the public, which means they cannot offer checking and savings accounts. 

NBFCs primarily engage in lending activities, providing loans and credit facilities to individuals and businesses. They can offer different types of loans, including personal, vehicle, housing, business, and more. NBFCs often specialize in specific sectors or types of lending, catering to niche markets or underserved segments.

Read – What is Banking?

Functions of NBFCs

Non-Banking Financial Companies (NBFCs) perform various functions, which include –

  1. Lending and Credit: NBFCs provide flexible lending solutions and credit facilities, including personal, vehicle, housing, etc., to individuals and businesses. 
  2. Asset Financing: NBFCs engage in asset financing, which involves providing funds for the purchase or leasing of assets such as machinery, equipment, vehicles, or real estate. 
  3. Investment and Advisory Services: Many NBFCs offer investment advisory, portfolio management, and risk assessment services. NBFCs may also facilitate investments in securities, mutual funds, and other financial instruments.
  4. Leasing and Hire-Purchase: NBFCs participate in leasing and hire-purchase activities, enabling individuals and businesses to acquire assets without full upfront payment. 
  5. Microfinance: Some NBFCs specialize in microfinance, providing small loans and financial services to low-income individuals, self-help groups, and microenterprises. 
  6. Factoring and Invoice Discounting: NBFCs engage in factoring and invoice discounting services. This provides immediate liquidity to the businesses, enabling them to meet working capital needs.
  7. Foreign Exchange Services: NBFCs also offer foreign exchange services, facilitating currency exchange and remittance transactions.

What are Banks?

Banks are a type of financial institution offering various financial services to individuals, businesses, and governments. They serve as intermediaries between depositors with excess funds and borrowers needing capital for various purposes. In India, banks are regulated by the Reserve Bank of India (RBI), the country’s central bank.  

Functions of Banks

Accepting Deposits: Banks accept deposits from individuals and businesses. Depositors can safely keep their money in banks, earn interest on deposits, and conveniently use banking services.

Lending and Credit: Banks provide loans and credit facilities to individuals and businesses for various purposes, such as personal loans, home loans, auto loans, working capital loans, and project financing. 

Payment Services: Banks facilitate payment transactions. They allow customers to make payments, transfer funds, and conduct financial transactions easily and securely.

Safekeeping of Valuables: Banks offer safe deposit lockers where customers can safely store valuable items like documents, jewellery, and other assets.  

Foreign Exchange Services: Banks facilitate currency exchange, wire transfers, and foreign currency accounts.

Investment and Wealth Management: Banks offer investment products like mutual funds, fixed deposits, and government bonds and assist clients in managing their investment portfolios.  

Trade Finance and Letters of Credit: Banks issue letters of credit, guarantees, and financing options to support importers and exporters in their trade transactions.

Financial Intermediation: Banks gather deposits from individuals and businesses and channel these funds towards lending and investment activities. 

Treasury Operations: Banks offer treasury services like foreign exchange trading, money market operations, investment in government securities, and managing the bank’s financial assets and liabilities.

Must Read – Commercial Banks – Overview, Types, and Functions

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FAQs

Can both banks and NBFCs provide loans?

Yes, both banks and NBFCs can provide loans. However, banks have broader authority to offer various types of loans, while NBFCs typically focus on specific types of lending, such as consumer loans or asset financing.

Can NBFCs accept deposits like banks?

No, NBFCs cannot accept demand deposits from the public like banks. However, they can accept term deposits or other types of deposits, subject to regulatory conditions.

Do both banks and NBFCs require a license to operate?

Yes, banks require a specific banking license to operate, which involves meeting stringent regulatory requirements. NBFCs also require registration and compliance with regulatory guidelines but do not require a banking license.

What is the difference in the services offered by banks and NBFCs?

Banks offer comprehensive financial services, including deposit-taking, lending, payment services, investment products, and more. In contrast, NBFCs primarily deal in lending and investment activities, offering services like loans, asset financing, and investment advisory.

Can NBFCs participate in electronic funds transfer systems?

NBFCs generally do not directly participate in electronic funds transfer systems or clearing and settlement of payment transactions as banks do. They do not have a clearing house membership.

About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio