NBFC vs Bank

NBFC vs Bank

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The term NBFC or, a Non-Banking Financial Company is now used to refer to a corporation that is registered under the Companies Act of 1956 and is governed by the Reserve Bank of India, the country's central bank, under the RBI Act of 1934. These organisations aren't banks, but they do engage in lending and other operations that banks do, such as maintaining stock portfolios, transferring money, offering loans and advances, credit facilities, investment and savings products, and trading on the money market. It engages in hire-purchase, leasing, infrastructure, venture capital, housing, and other financial businesses. An NBFC does accept deposits, but it only accepts term deposits; it does not accept demand-repayable deposits. These firms began to appear in India in the middle of the 1980s. Popular NBFCs include ICICI Ventures, Sundaram Finance, SBI Factors and the Kotak Mahindra Finance. NBFC is split into three groups, which are as follows:

1. Asset Businesses

2. Loan Businesses

3. Investment Firms

Concept of a Bank

Banks are financial institutions that have been given permission by the government to carry out banking operations like taking deposits, extending credit, controlling withdrawals, paying interest, clearing checks, and offering consumers a variety of basic utility services. The supreme institution that controls the nation's overall financial system is the banking industry. It serves as a financial middleman between savers and borrowers, ensuring the economy run smoothly. Banks can be found in the public, private, or foreign sectors. They are in charge of making loans, establishing credit, utilising deposits, transferring money securely and on time, and offering public utility services. Commercial banks are operated with the goal of making a profit, and its owners are the shareholders.

Important Differences between an NBFC and a Bank - On the following bases, NBFCs and banks can be distinguished from each another clearly:

• The term "bank" refers to a legally recognised financial intermediary that attempts to offer banking services to the general public. A business that offers banking services to customers without having a bank license is known as an NBFC.

• A bank gets its registration from the Banking Regulation Act of 1949, whereas an NBFC is formed under the Indian Companies Act of 1956.

• Such demand-repayable deposits cannot be accepted by an NBFC. Demand deposits are not accepted by banks.

• In NBFCs, foreign investments up to 100% are permitted. On the other hand, only private sector banks—a maximum of 74%—is permitted to receive foreign investment.

• While NBFCs are not a part of the system, banks are an essential component of the payment and settlement cycle.

• The maintenance of reserve ratios like the CRR or SLR is required for banks. NBFCs, on the other hand, are exempt from the requirement to maintain reserve ratios.

• The Deposit Insurance and Credit Guarantee Company provides the deposit insurance service to bank depositors (DICGC). For NBFC, such a service is not available.

• NBFCs do not participate in the creation of credit; banks do.

• Customers can obtain transaction services from banks such as an overdraft facility, traveler's checks, money transfers, etc. This type of service is not offered by NBFC.

In conclusion, banks are chartered by the government to accept deposits and extend credit to the general population, whereas NBFCs are primarily founded to extend credit to the poor sector of society. A bank has to abide by stricter licensing necessities as compared to an NBFC. Furthermore, NBFCs are permitted to operate certain businesses that banks are not permitted to, such as those unrelated to banking.