What is the Difference Between a Bank and NBFC?

What is the Difference Between a Bank and NBFC?

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Published on : May 17, 2024

Banks and NBFCs are financial institutions that play important roles in the financial world. But what exactly sets NBFCs apart from banks?

Banks are traditional institutions that accept public deposits, lend to individuals and businesses, and offer merchant banking and other financial services. NBFCs, on the other hand, provide a wide range of financial services, such as personal loans, business loans, vehicle loans, gold loans, salary advances, asset financing, and microfinancing.

Here, we will explore the key differences between banks and NBFCs to understand their roles and what these differences mean for consumers or businesses.

What are NBFCs?

Think of NBFCs as financial service providers offering loans, insurance, and investment options, similar to banks, but without a full banking license. This means they can offer many of the same services as banks, like giving loans or buying and selling investments. However, unlike banks, they can’t take your everyday deposits (like checking or savings accounts). However, they can accept deposits from specific groups of individuals like company directors, shareholders and relatives.

There are two main types of NBFCs:

  • Those that deal with giving loans and investments: This includes things like personal loans, car loans, or buying stocks and bonds.
  • Those that accept deposits: These NBFCs offer special plans where you can invest your money, similar to a fixed deposit at a bank.

Functions of NBFCs

Here are some of the functions of NBFCs:

Lending and Credit

NBFCs are known for their flexible lending options. They offer personal loans, car loans, and even home loans to fit the needs of individuals and businesses.

Asset Financing

NBFCs can help you finance assets you need, like machinery, equipment, vehicles, or even property. This means they can provide loans or leases to cover the cost of these purchases.

Investment and Advisory Services

Beyond loans, some NBFCs also act as financial advisors. They can help you manage your investments, assess risk, and even invest in things like stocks, mutual funds, and other financial products.

Factoring and Invoice Discounting

NBFCs can help businesses improve their cash flow by offering factoring and invoice discounting. These services provide immediate access to cash tied up in unpaid invoices, helping businesses cover short-term expenses or invest in growth.

Foreign Exchange Services

NBFCs can also be a convenient option for your foreign exchange needs. This includes exchanging your currency for travel or business, as well as sending money abroad (remittance transactions).

Leasing and Hire Services

NBFCs can help you acquire assets like machinery, equipment, or even vehicles without needing the full amount upfront. This is done through leasing or hire-purchase agreements, where you spread out the cost in regular payments.

What are Banks?

Banks are financial institutions licensed to accept public deposits, such as savings and current accounts. They play a central economic role by providing essential financial services, including lending money, offering credit, managing payments, and facilitating transactions.

Banks also offer a range of products like mortgages, personal loans, credit cards, and investment services. Regulated by government authorities, banks ensure the security and stability of the financial system.

Banks are divided into three categories: Commercial Banks, Small Finance Banks, Payments Banks, and Co-operative Banks

Functions of Banks

Here are some of the main functions of banks:

Accepting Deposits

You can safely deposit your cash in the bank and withdraw it whenever needed.

Payments and Settlements

Banks facilitate transactions using various payment options, including electronic transfers, debit/credit cards, and checks.

Credit Deposits

Banks help manage the flow of money. One way they generate deposits is by lending money to customers. This creates a line of credit, which is essentially a borrowable amount credited to the borrower’s account. Interestingly, customers sometimes deposit the borrowed funds back into the same bank. These deposits, even though they originated from a loan, are not considered “credit deposits” in standard banking terminology. They are simply regular deposits in the customer’s account.

Issue of Note/Draft

Banks create credit instruments like banknotes, bank drafts, letters of credit, checks, etc., and allow others to transfer them. These tools are particularly beneficial in reducing the amount of cash used and facilitating inexpensive and easy transfers.

Difference Between Banks and NBFCs

Here are some of the most important differences between banks and NBFCs:

Basis of Comparison NBFCs Banks
Regulatory Act NBFCs are incorporated as companies under the Companies Act 2013 and are regulated by RBI They are incorporated under the Banking Regulation Act of 1949
License Requirement Do not require a banking license to operate Require banking license to operate
Lending Standards  Compared to banks, NBFCs may have more lenient lending standards and practices Compared to NBFCs, banks may have stricter lending guidelines and standards
Priority sector lending  Set aside a specific portion of their lending for priority sectors Do not need to adhere to priority sector lending guidelines
Services Offer services like mutual funds, loans, stocks, savings, and investment programs Offers services like credit card facilities, deposits, money transfers, loans, and check payments
Acceptance of Deposits Do not accept demand deposits Accept deposits from the public
Issuance of cheques Cannot issue a cheque Can issue and accept cheques
Extended Foreign Investment NBFCs can receive foreign investments up to 100% Banks in India have a lower cap on foreign ownership (currently exceeding 74%)

Conclusion

While both banks and NBFCs provide financial services, they differ significantly in their regulatory frameworks, services offered, and customer engagement. NBFCs are beneficial due to their flexibility, faster processing times, and lenient eligibility criteria, making them accessible to a broader audience, including those underserved by traditional banks. LoanTap offers personal loans with competitive interest rates and customizable loan products. The user-friendly digital platform ensures a seamless borrowing experience.

FAQs

What is the primary benefit of getting a loan from an NBFC compared to a bank?

Ans. NBFCs usually provide customized loan solutions, more flexible eligibility requirements, and quicker loan processing.

Do NBFCs finance infrastructure projects?

Ans. Yes, many NBFCs focus on financing infrastructure, offering important funding for ambitious projects.

Do NBFCs have to comply with SLR and CRR regulations?

Ans. NBFCs do not need to maintain Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR), which are necessary for banks.

Are NBFCs able to conduct foreign exchange?

Ans. No, unlike banks, NBFCs are not permitted to conduct foreign currency business.

What kinds of loans are often provided by NBFCs?

Ans. NBFCs generally provide personal loans, business loans, vehicle loans, loans against property, gold loans, and more.










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