Major Differences Between a Bank and NBFC

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Major Differences Between a Bank and NBFC

For financial services, two types of institutions are famous - Non-Banking Financial institutions and Banks. These both are financial institutions that cater for the financial needs of the customers. Banks are the traditional way of investing money and many people trust banks as they are backed by the government.

The NBFC is quite a new perspective as compared to banks. These institutions provide lending services to customers without heavy paperwork and security. They cover people from lower financial backgrounds. In this article, we shared the difference between banks and NBFCs.

What are Non-Banking Financial Companies?

The NBFC is a company registered under the Companies Act, of 1956. Its business activities are providing loans and advances, acquisition of shares/ stocks/ bonds/ debentures/ securities issued by the Government or local authorities or other marketable securities. It can conduct different financial activities, only if it has an NBFC license.

The business can include leasing, hire-purchase, insurance business, and chit business. But it should not include any institution whose principal business is in agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/ purchase/ construction of immovable property.

However, a Non-Banking Financial Institution (NBFC) receives any deposit under any scheme or arrangement in one lump sum or instalments by way of contributions or in any other way, the company is known as a non-banking financial company.

What are Banks?

Banks are financial institutions that accept deposits from customers for different accounts such as current accounts, savings accounts, joint accounts, etc. In return for these deposits, the bank provides some rate of interest on the amount as per the type of account chosen by the customers. The banks have two major types - private banks and public banks. Having a banking license is important to start providing financial services.

However, the rules for these banks are set by the Reserve Bank of India (RBI). However, these banks must follow the rules and regulations set by RBI to avoid any penalty. The Banking Companies Act of India, 1949 explains banking as accepting public money deposits for lending and investment which are then repaid on demand and withdrawn by cheque or draft. 

So, the banks are the institutions that ensure that the public financial needs are fulfilled through different products and services. Below are some essential services offered by the banks are as follows: 

• Receiving demand or time deposits
• Discounting notes
• Payment of interest
• Providing loans
• Investment in securities
• Collection of cheques, drafts, and notes
• Issuing drafts

Difference Between NBFCs and Banks

Non-banking financial companies (NBFCs) have a lending and investments business similar to banks. But there are some differences and these are as follows:

Conclusion

To conclude, banks and NBFCs are both financial service providers, regulated by the Reserve Bank of India (RBI). The working models of these two are different. The primary function of banks is to accept deposits and grant loans in return for some security. 

The NBFC also cater for the financial needs of customers and provides lending services. The eligibility of NBFC to provide loans is not complex as compared to the banks. NBFC does not require heavy paperwork to provide loans. The compliances of banks are strict as compared to NBFC. If you want to register an NBFC, then reach out to Registrationwala. We help you with applying to finally obtain an NBFC license.

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