Banks and NBFCs are both important parts of India’s financial system. They help people get loans, manage money and meet their financial needs. At first, they may seem quite similar because both offer many financial services. However, there are some important differences between them.
An NBFC stands for Non-Banking Financial Company. It is a financial company that offers services similar to those of a bank, such as personal loans, business loans, vehicle loans and other credit services. However, it does not have the same rights and powers as a bank.
The main difference is that a bank can accept savings and current account deposits, while an NBFC cannot offer these facilities. Let us understand the differences in simple terms.
What Is a Bank?
A bank is a financial institution that accepts money from people and businesses in the form of deposits. It also provides loans to people who need money for personal or business purposes.
People can open savings accounts and current accounts with banks. They can deposit their money, withdraw cash, transfer funds and make payments through different services. Banks can also issue cheques and debit cards.
In India, the Reserve Bank of India (RBI) controls and regulates banks. Some well-known examples are SBI, HDFC Bank and ICICI Bank.
What Is an NBFC?
An NBFC is a company that offers financial services but does not have a full banking licence. It mainly provides loans and other financial products to individuals and businesses.
For example, a person who needs money to buy a car can approach an NBFC for a vehicle loan. Similarly, a small business owner can get a business loan from an NBFC.
NBFCs also offer gold loans, personal loans and equipment finance. Some well-known examples in India are Bajaj Finance, Shriram Finance and Mahindra Finance.
The RBI regulates NBFCs under the RBI Act, 1934 and other applicable rules. However, their rules are not exactly the same as those for banks.
Difference Between an NBFC and a Bank
1. Meaning
A bank is a financial institution that has a banking licence and can offer a wide range of banking services.
An NBFC is a financial company that offers services such as loans and credit facilities but does not have a banking licence. It cannot provide all the services that a bank can.
2. Acceptance of Deposits
Banks can accept money from people in the form of savings accounts, current accounts and fixed deposits. Customers can keep their money in these accounts and withdraw it as per the rules.
NBFCs cannot accept demand deposits. This means they cannot offer regular savings or current accounts like banks. However, certain NBFCs can accept fixed or term deposits if they have RBI approval and meet the required rules.
3. Savings Account Facility
Banks allow customers to open savings accounts. These accounts help people keep their money safe, receive payments and earn interest as per the bank’s rules.
NBFCs cannot offer savings accounts. Customers who need this facility must open an account with a bank.
4. Cheque Facility
Banks can issue cheques that customers can use to make payments. These cheques are drawn on the bank itself.
NBFCs cannot issue cheques drawn on themselves because they do not have the same status as banks. This is one of the major differences between the two.
5. Payment System
Banks can become part of the payment and settlement system. They can offer services such as fund transfers, debit cards and other payment facilities as per RBI rules.
NBFCs cannot independently operate as banks within the payment system. However, some NBFCs can offer certain payment-related services through approved arrangements and licences.
6. Deposit Insurance
Money kept in eligible bank deposits has insurance cover from the Deposit Insurance and Credit Guarantee Corporation (DICGC). The insurance limit is up to Rs. 5 lakh per depositor per bank, including both the principal and interest.
NBFC deposits do not have this DICGC insurance cover. Therefore, customers must check the company’s financial position and deposit rules before they place their money with an NBFC.
7. Regulation
Both banks and NBFCs come under the control of the Reserve Bank of India. However, different laws and rules apply to them.
Banks are regulated under the Banking Regulation Act, 1949, along with other applicable laws and RBI rules.
NBFCs are regulated under the RBI Act, 1934, and other rules set by the RBI. These rules cover their financial activities, loans, deposits and other operations.
8. Loan Services
Banks offer different types of loans, such as home loans, personal loans, education loans, vehicle loans and business loans.
NBFCs also offer many of these loan products. They often focus on specific types of credit, such as gold loans, vehicle loans, equipment finance and loans for small businesses.
Both provide credit to people and businesses, but their loan terms, interest rates and approval rules may differ.
9. Credit Creation
Banks play an important role in credit creation. They accept deposits from customers and use a part of these funds to provide loans, as per RBI rules. This process helps money flow through the economy.
NBFCs also provide loans, but they cannot create credit in the same way as banks through demand deposits. They mainly depend on their own funds, market borrowings and other permitted sources to provide credit.
Why Are NBFCs Important?
NBFCs play an important role in India’s financial system. They help people who may not always find it easy to get loans from traditional banks.
For example, a small business owner may need money to buy machines or expand a shop. An NBFC can offer a loan based on its own rules and the customer’s ability to repay it.
NBFCs also offer vehicle loans, gold loans and other specialised financial products. These services help people meet personal and business needs.
They also support small businesses and the MSME sector by providing access to credit. In many areas, NBFCs serve customers who have limited access to traditional banking services.
As a result, they help more people access formal financial services and support economic growth.
Conclusion
Banks and NBFCs both play an important role in India’s economy. They offer loans and other financial services that help people and businesses meet their needs.
However, the main difference lies in their powers and services. Banks can accept demand deposits, offer savings and current accounts, issue cheques drawn on themselves and take part in the payment system. NBFCs do not have these same rights.
Another important difference is that eligible bank deposits have DICGC insurance of up to Rs. 5 lakh per depositor per bank, while NBFC deposits do not have this cover.
In simple words, an NBFC works like a financial company that offers many bank-like services, but it does not have all the powers of a bank. Both are useful, but they serve customers in different ways.
ALSO READ: How to Judge a Company’s Competitive Moat Clearly!
