Banks and Non-Banking Financial Companies are the two most frequent types of financial intermediaries in any financial system. Banks are conventional entities that accept public deposits and make public loans. In addition to mobilizing deposits and distributing loans, banks now provide a variety of other functions, such as merchant banking and other financial services. This blog will explain the distinction between banks and non-bank financial companies (NBFCs).

Non-Banking Financial Companies (NBFCs), on the other hand, offer a wide range of financial services to a variety of consumer groups without the need for a banking license. The RBI regulates banks under the Banking Regulation Act, whereas non-banking financial enterprises are governed by particular provisions of the RBI Act.

The Reserve Bank of India regulates NBFCs as registered companies under the RBI Act of 1934 and the Companies Act of 2013. NBFCs are not banks, but they do lend and do other things like give loans and advances, credit facilities, savings and investment products, money market trading, managing stock portfolios, money transfers, and so on. Before NBFCs may begin operations, they must be registered. They meet the needs of individuals, enterprises, and corporations who would not otherwise be able to access traditional banking services, making them critical to India’s financial system.

What are Banks?

A bank is a financial institution that provides a variety of financial services to its customers, such as deposit accounts, loans, and other financial services. Banks are critical to the economy because they provide people and businesses with the funds they require to invest and expand. Banks operate by accepting client deposits and disbursing payments to borrowers. They make money by charging interest on loans and investments, in addition to paying interest to depositors.

Government entities, primarily central banks, are in charge of the laws and regulations that govern the banking industry. In addition to deposit accounts such as checking and savings accounts, banks provide a wide range of services to their customers. Customers can save money in these accounts in a secure environment while also collecting interest.

Aside from loans and credit cards, banks provide credit products that allow clients to borrow money for a variety of purposes. Banks also provide investment services such as stock trading, bond trading, and mutual fund trading. Customers can use these services to invest their money in a variety of financial assets, allowing them to profit from their initial investment.

The banking sector has seen significant changes recently as a result of technological developments and increased competition from non-bank financial entities. Because of the increased popularity of online banking, customers may now access their accounts and conduct transactions from their computers or mobile devices.

What is the Difference Between Banks And NBFCs?

There are many differences between NBFCs and banks –

Banks

• The Banking Regulation Act of 1949 established banks.
• They have a banking license.
• Deposit Credit Guarantee Corporation (DICGC) allows it to bank depositors.
• Banks lend to well-established enterprises and MSMEs with strong credit scores and good CIBIL ratings.
• Only private sector banks are permitted to take FDI, and only up to 74%.
• The bank must adhere to reserve ratios such as CRR or SLR.
• In the case of banks, credit creation is permitted.
• One of the primary functions of banks is to accept demand deposits.
• Banks may have tougher lending restrictions and requirements than NBFCs.
• Banks can provide their customers with transaction services such as money transfers and traveler’s checks.

NBFCs

1. Non-Banking Financial Companies are formed as corporations under the Companies Act of 2013.
2. Transaction services such as money transfers and traveler’s checks are not permitted for NBFCs.
3. NBFCs charge higher interest rates. There is no set limit on interest rates.
4. In the case of NBFC, credit creation is not permitted.
5. The RBI grants a Certificate of Registration (CoR) to the NBFC.
6. Deposits repayable on demand cannot be accepted by an NBFC.
7. The target client bases of NBFC include start-ups and underprivileged segments of society who are not catered to by banks. As a result, they are more approachable.
8. NBFCs may have more flexible lending criteria and practices than banks.

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