Differences between Banks and NBFCs

Banks and Non-Banking financial companies are vital institutions in the country. They offer similar services to the citizens of the country. A similar service is co-origination of loans by banks and NBFCS. However, there is a critical difference between banks and NBFCs or non-banking finance companies. 

The banks of India are a part of the country’s financial system. They work towards maintaining the economic structure of the country. Non-bank institutions complement the working of the banks of India. One similarity is the co-origination of loans by banks and NBFCs. 

You might be wondering what that difference is and how NBFCs are different from banks. We will help you learn and understand these things. 

What are Banks?

Banks are financial institutions working under the authority of the government. They conduct banking activities like accepting deposits, grant loans, managing withdrawals with interest pay, cheque clearance, and general utility to the public. 

Banks dominate the financial system of the country as they are helping in maintaining the cash flow in the country. They are the intermediaries between the people who deposit money and those who borrow money from the bank. This ensures that the financial system of the government is running efficiently. 

Banks of India exist in three forms: private sector banks, public sector banks, and foreign banks. These three banks are responsible for the cash flow in the country. Ownership of commercial or private banks lies with the shareholders of the bank. 

What are NBFCs?

NBFC are a part of the non-banking financial institutions of the country. They are also known as Non-Banking Financial Companies. All NBFCs need to register under the Companies Act of 1956 to start their operations. 

NBFCs are controlled by the Reserve Bank of India, the central bank or the apex institution in the country. This is because of the RBI Act of 1934. 

A Non-banking financial institution isn’t a bank. However, they do share a few similarities with a bank. NBFCs give out loans and advances to the people. They deal in the money market of the country. Additionally, they have a credit facility, providing a place for depositing savings and investments. 

A few functions of NBFCs are- hire for purchase, leasing, financing infrastructure, venture capital, etc. NBFCs can accept deposits but only in limited-term deposits; they don’t take deposits that they have to repay on demand. 

There are three kinds of Non-banking financial institutions in the country: 

• Asset Companies 
• Loan Companies
• Investment companies 

Differences between Banks and NBFCs or Non-Banking Finance Companies

Banks and NBFCs are both part of important institutions in the country. They provide financial services to the citizens of the country. Sometimes you might wonder how NBFCs are different from banks. Here are some points of difference between banks and NBFCs or non-banking finance companies: 

1. Authorisation: a critical difference between banks and NBFCs or non-banking finance companies is that of authorisation. Banks need to be authorised by the government to start their operations. Additionally, their goal is to provide benefits to the public. NBFCs don’t need to have a banking licence to provide banking facilities to the public. 
2. Investment: These two institutes have a different percentage up to which they can have foreign investments in their organisation. A bank can have a 74 per cent grant for the foreign financial asset. Additionally, a Non-Banking Financial Company can have 100 per cent financial investment, which is higher than a bank. 
3. Constitution: Banks of India are established under the Banking Regulation Act, 1949. Each bank in India is established under this Act and works according to the regulations of this Act. NBFCs are found under the Companies Act, 1956. They have to work according to the rules and regulations of the Companies Act. 
4. Demand deposits: The demand deposit is a benefit that a depositor can enjoy. It is a fund that the depositor can withdraw from a financial institution like a bank. Non-banking financial institutions don’t provide this benefit to their depositors. They don’t accept demand deposits for any transaction. 
5. Maintaining a reserve ratio: A reserve ratio is a part of the individual’s deposit that a bank holds as mandated by the country’s central bank. The central bank sets the reserve ratio for all the banks of India to follow. However, an NBFC doesn’t need to follow this process and keep a reserve ratio. 

Conclusion 

Banks and NBFCs are part of the financial structure of the country. Co origination of loans by banks and NBFCs is a significant similarity between the two. However, banks of India and Non-banking financial institutions are two different country structures.