Differences between banks and NBFCs that you cannot afford to miss Daily Journal

Published on: May 17, 2024

Banks and non-banking financial companies are financial institutions that play important roles in the financial world. But what specifically distinguishes NBFCs from banks?

Banks are traditional institutions that accept public deposits, lend to individuals and businesses, and provide commercial banking and other financial services. On the other hand, non-banking financial companies offer a wide range of financial services, such as personal loans, Business loansCar loans, gold loans, salary advances, asset financing, and microfinance.

Here we will explore the key differences between banks and NBFCs to understand their roles and what these differences mean for consumers or businesses.

What are non-banking financial companies?

Think of NBFCs as financial services providers that offer loans, insurance, and investment options, similar to banks, but without a full banking license. This means that they can provide many of the same services as banks, such as granting loans or buying and selling investments. However, unlike banks, they cannot accept your daily deposits (such as checking or savings accounts). However, they can accept deposits from specific groups of individuals such as company directors, shareholders and relatives.

There are two main types of non-banking financial companies:

• Those that deal with making loans and investments: This includes things like personal loans, car loans, or purchasing stocks and bonds.
• Those that accept deposits: These non-banking financial companies offer special plans where you can invest your money, similar to a fixed deposit in a bank.

NBFCs Jobs

Some of the functions of NBFCs are as follows:

Lending and credit

NBFCs are known for their flexible lending options. They offer personal loans, car loans, and even home loans to suit the needs of individuals and businesses.

Asset financing

Non-banking financial companies can help you finance the assets you need, such as machinery, equipment, vehicles or even property. This means they can provide loans or leases to cover the cost of these purchases.

Investment and advisory services

In addition to loans, some non-banking financial companies also act as financial advisors. They can help you manage your investments, assess risks, and even invest in things like stocks, mutual funds, and other financial products.

Factoring and invoice discounting

Non-banking financial companies can help businesses improve cash flow by offering factoring and invoice discounting. These services provide immediate access to cash tied up in unpaid invoices, helping businesses cover short-term expenses or invest in growth.

Foreign currency exchange services

Non-banking financial companies can also be a suitable option for your foreign exchange needs. This includes exchanging your currency for travel or work, as well as sending money abroad (remittance transactions).

Rental and leasing services

Non-banking financial companies can help you acquire assets such as machinery, equipment or even vehicles without needing the full amount up front. This is done through lease or purchase agreements, whereby you distribute the cost into regular payments.

What are banks?

Banks are financial institutions licensed to accept public deposits, such as savings and checking accounts. They play a central economic role by providing basic financial services, including lending money, extending credit, managing payments, and facilitating transactions.

Banks also offer a range of products such as mortgages, personal loans, credit cards and investment services. Regulated by government authorities, banks work to ensure the security and stability of the financial system.

Banks are divided into three categories: commercial banks, small finance banks, payments banks, and cooperative banks

Banking jobs

Some of the main functions of banks are as follows:

Accept deposits

You can safely deposit your money in the bank and withdraw it when needed.

Payments and settlements

Banks facilitate transactions using various payment options, including wire transfers, debit/credit cards, and checks.

Credit deposits

Banks help manage the flow of funds. One way they generate deposits is by lending money to customers. This creates a line of credit, which is essentially a loanable amount credited to the borrower’s account. Interestingly, customers sometimes deposit borrowed money in the same bank. These deposits, although originated from a loan, are not considered “credit deposits” in standard banking terminology. They are just regular deposits into the customer’s account.

Issuance of memorandum/draft

Banks create credit instruments like bank notes, bank drafts, letters of credit, cheques, etc. and allow others to convert them. These tools are particularly useful in reducing the amount of cash used and facilitating easy and inexpensive transfers.

The difference between banks and non-banking financial companies

Here are some of the most important differences between banks and NBFCs:

Basis for comparison	Non-banking financial companies	Banks
Regulatory law	NBFCs are established as companies under the Companies Act, 2013 and are regulated by the Reserve Bank of India (RBI).	It was incorporated under the Banking Regulation Act, 1949
Licensing requirements	You do not need a banking license to operate	Requires a banking license to operate
Lending standards	Compared to banks, NBFCs may have more lenient lending standards and practices	Compared to non-banking financial companies, banks may have stricter lending guidelines and standards
Lending to priority sectors	Allocating a specific portion of its loans to priority sectors	You do not need to adhere to priority sector lending guidelines
Services	Providing services such as mutual funds, loans, stocks, savings and investment programs	It offers services such as credit card facilities, deposits, money transfers, loans and check payments
Accept deposits	Demand deposits are not accepted	Accepting deposits from the public
Issuing checks	The check cannot be issued	Checks can be issued and accepted
Expanded foreign investment	Non-banking financial companies can receive up to 100% foreign investment.	Banks in India have minimum foreign ownership (currently exceeding 74%)

conclusion

While both banks and NBFCs provide financial services, they differ significantly in their regulatory frameworks, services offered and customer engagement. NBFCs are advantageous because of their flexibility, faster processing times, and lax eligibility criteria, making them accessible to a wider audience, including those who are underserved by traditional banks. LoanTap Offers Personal loans With competitive price Interest rates and customizable loan products. The user-friendly digital platform ensures a seamless borrowing experience.

Frequently asked questions

What is the main benefit of taking a loan from an NBFC compared to a bank?

The answer. NBFCs typically provide customized loan solutions, more flexible eligibility requirements, and faster loan processing.

Do non-banking financial companies finance infrastructure projects?

The answer. Yes, many NBFCs focus on infrastructure financing, providing critical financing to ambitious projects.

Do NBFCs have to comply with SLR and CRR regulations?

The answer. NBFCs do not need to maintain Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR), which are necessary for banks.

Are national non-banking financial companies able to conduct foreign exchange?

The answer. No, unlike banks, non-banking financial companies are not allowed to conduct business in foreign currency.

What types of loans do non-banking financial companies often offer?

The answer. NBFCs generally offer personal loans, business loans, vehicle loans, loans against property, gold loans, and more.