Difference Between Bank and NBFCs

What is an NBFC?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, etc.

What is a Bank?

Banks are financial organizations such as stock savings and other reciprocal, incurred with the privilege of taking deposits and making loans. These include saving and checking accounts services straight up, credit cards, mortgage, and personal finance among others. Banks play a crucial role in any financial system and in the country of India, their activities and decisions are governed by the Reserve Bank of India or RBI. They have an impact on the economy due to their ability to intermediate, offer credit, and also serve as the conduit of money supply stability.

All the differences between banks and NBFC become clear step by step in the following points:

Regulatory Framework

Banks: Accepting deposition under the Banking Regulation Act, 1949 of India operating under the Reserve Bank of India. They possess strict policies on the ratio of reserves, capital base, and firm financial standards.

NBFCs: Another institution owned by the RBI but operational under the RBI Act of 1934. Investment banks can be said to have less stringent rules compared to the banking industry especially on issues to do with reserves and capital ratios.

Deposit Acceptance

Banks: Can take demand deposits, which can be withdrawn by demand and includes current accounts where money is deposited with an understanding that it will be paid on demand ‘by cheque, draft, etc.’

NBFCs: Not permissible to accept demand deposits. They are allowed to take only time deposits and some NBFCs may have a prohibition on this kind of business.

Payment and Settlement Systems

Banks: Perform operations directly in the payment and settlement system. They offer payment facilities including chequebooks, debit cards, and electronic transfers.

NBFCs: May not have access to a given payment and settlement system without privileges or any other form of permission. They rely on banking institutions for the provision of such services.

Credit Creation

Banks: Build credit by way of lending and such exercises do play a very important role in determining the amount of money supply in the economy.

NBFCs: It is not sensible to issue credit in the same way that banks do. Their effect on the money supply is moderate – mostly this figure depends on more general factors.

Maintenance of Reserves

Banks: It means, holding a part of their deposits as cash with the RBI known as Cash Reserve Ratio – CRR and in the form of government securities, called Statutory Liquidity Ratio – SLR.

NBFCs: It is not obligatory to hold CRR or SLR and therefore will not have any effect of this ratio on the bank assets. It grants them more flexibility in the spending of their funds but at the same time exposes them to various risks.

Key Takeaways of Difference Between Bank and NBFCs

Regulation: Policies and laws regarding NBFCs are less stringent compared to the policies governing banks which makes the financial environment more stable but at the same time places a lot of operational constraints.

Deposit Acceptance: Where the demand and the time deposits can be accepted by the banks, NBFCs have more considerable restrictions in this sphere, but people prefer them as the place where they can keep their money safely.

Services and Products: On one hand, numerous banks provide an extensive range of financial services and products; on the other hand, NBFCs offer a limited number of standard and value-added services, but these services are targeted solely at specific segments of the market.

Interest Rates: The interest rates may be higher than those one may find in banks but they offer quite attractive products for both borrowers and deposit holders with slightly higher risk involved.

Reserve Requirements: While it is positive in the sense that there are no required reserves for NBFCs, this has certain implications meaning that NBFCs have flexibility when it comes to utilization of their funds but expose them to different types of financial risks.

It is easier to make the right decisions when choosing the right financial institution for saving, investing, or borrowing money when you understand the difference that exists between all the institutions.