Overview of Banks and NBFCs
Banks and NBFCs (Non-Banking Financial Corporations) are pivotal financial intermediaries spread across the world. Both have several similarities and differences. However, I will cover all 8 key differences between banks and NBFCs in today’s guide. Before moving, let’s have a glance at the definitions of both.
- Banks: Banks are financial institutions that have been granted permission by the government to carry out banking operations like controlling withdrawals, clearing checks, paying interest, taking deposits, extending credit, and offering consumers various basic utility services.
- NBFCs: These organizations 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, savings and investment products, and trading on the money market.
Banks are common across India. But, they could not look after every segment related to society’s money. Because of this, NBFCs were created in both the public and private sectors to support banks in giving loans to individuals. As per Statista Reports 2022, there are 9680 registered NBFCs across India.
8 Key differences between Banks and NBFCs
1. Constitution & Authorization
A bank is registered under the Banking Regulation Act of 1949, whereas an NBFC is formed under the Indian Companies Act of 1956. The term “bank” refers to a legally recognised financial intermediary attempting to offer public banking services. Moreover, the Reserve Bank of India (RBI) governs these financial bodies.
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 their owners are the shareholders. On the other hand, NBFCs serve as Investment firms, loan lenders, etc.
3. Foreign Investment Allowance
The Reserve Bank of India regulates NBFC operations within the parameters of the RBI Regulation Act of 1934. NBFCs are permitted to invest 100% of their funds, which is much higher than banks. Banks are only allowed to invest 74% of their funds whereas.
4. Maintenance of the Reserve Ratio
The reserve ratio is a portion of the depositor’s balance retained by the cash bank. CRR and SLR are some examples. NBFCs can operate without maintaining reserve ratios. However, banks must do so since it affects the nation’s money supply over time.
5. Deposit Insurance system
When a bank fails or is not capable of repaying its depositors, deposit holders are protected by deposit insurance. Banks can definitely use the deposit insurance framework offered by the deposit insurance and the credit guarantee (DICGC) firm to secure their clients’ funds. However, NBFCs are not provided with this service.
NBFC deposits are rated to show the credibility or authority of the loans. On the other hand, bank deposits do not require any ratings since they can be reimbursed on demand.
When comparing, Banks are preferred for safe returns. While ones looking for high returns and ready to take risks can choose NBFCs. The majority of high-quality loans are AAA-rated. The higher the rating, the higher the security and prompt clearance of principal and interest.
7. Fixed Deposits
Fixed deposit is a service and is offered by both bodies. But, the difference is that NBFC fixed deposits are frequently rated by our nation’s rating agencies, while bank fixed deposits don’t need any ratings. As said before, NBFC fixed deposits are not insured; this is the only reason behind this difference.
8. Other Services
When talking about services, the Demand Deposit (DD) service is the most significant distinction that separates Banks and NBFCs. Banks can issue demand drafts or take fixed deposits on requests, while NBFCs are not permitted for the same. A small proportion of NBFCs across India do have permission to take fixed deposits (not demand-repayable deposits). However, they are strictly bound to comply with RBI’s rules.
Money transfer, overdraft facility, and on-demand withdrawals are some services that banks usually offer. On the other hand, no such services are provided by NBFCs. They offer investments, bonds hire-purchase, loans and other lending-related services. However, both organisations have different limitations for interest rates. NBFCs can charge a maximum of 12.5 % per annum (Ceiling rate).
Banks and NBFCs are two of the most commonly heard terms in the financial industry. Both differ on various aspects, including authorisations, services, and permissions. Due to differences, banks and NBFCs both have different advantages.
Banks may offer low-interest rates for loans, but their approval rate is meagre, and the application process is time-consuming. However, you can take the help of MySafeLoan. Instant processing, reasonable interest rates, high approval rate, and whatnot – MySafeLoan ensures you don’t have to stand in queues or take care of hundreds of documents for a loan.