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Listing the Differences between NBFC and Bank – NBFC Registration

The literature contains sufficient evidence, which highlights the instrumental role played by the financial system which helps in boosting the development of an economy. Under the financial system, the resources are channeled directly from the savers to the investors, and such a process is called as financial intermediation.

In whole, a financial system is endowed with three elements, which are as follows:

The first element, indicates to the financial intermediaries.

Second element points to the financial instruments.

Lastly, the financial markets play a crucial role.

With special focus on the financial intermediaries, their job is to facilitate the transactions between the savers and investors. The fundamental role enacted by the financial intermediaries lies in having to translate the savings into investment.

While taking into account the banks and other non-banking financial companies, it can be said that both of them are a type of a financial intermediary, and work towards extending the similar kind of financial services to the customers.

The ultimate difference between bank and NBFC is that the NBFC is an entity that cannot issue the self-drawn cheques and also the demand drafts.

Another major difference between the NBFC and the bank is that while the banks play a crucial role in the country’s payment mechanism, non-banking financial companies do not take part with respect to such transactions.

Considering the fact that finance is the most important element, required by any individual or business entity, therefore, the NBFC’s came into existence to assist the banks, so that the large sections of the society can be catered to, with respect to both the public and private sector.

Let’s try and draw the comparison between the NBFC and the Banks

The comparison can be drawn between the NBFC and the Bank, as follows:

1) The first criteria on the basis of which difference can be drawn between NBFC and the bank points to the meaning.

Firstly, an NBFC is a kind of a company, wherein the banking services are provided to the people, such that there is no need to hold the banking license.

On the other hand, a bank is a kind of a financial intermediary which is duly authorized by the bank. Its aim is to provide the banking services to facilitate the general public.

2) The second basis of the comparison is set at incorporated under. On the first hand, the NBFC is incorporated under the Companies Act, 1956, while the Bank is incorporated under the Banking Regulation Act, 1949.

3) The third basis of comparison points to the Demand Deposit. Under NBFC it stands at not accepted, while on the other hand, the demand deposit stands at accepted under the category of Bank.

4) The next basis for comparison stands at foreign investment. Under NBFC, it is allowed up to the level of 100%. While, on the other hand, the foreign investment is allowed up to the mark of 74% in case of the private sector banks.

5) Payment and settlement system is the next basis for comparison. Under the NBFC, it doesn’t form part of the system, whereas, under the bank, it is an integral component of the system.

6) The next comparison is founded on maintaining the reserve ratios. Under the NBFC, it is not required, whereas under the bank, it stands compulsory.

7) Deposit insurance facility is the next basis of comparison, wherein it shows as not available under the NBFC, while on the other hand, the status stands at available under the bank.

8) On the basis of credit creation, credit is not created under the NBFC, however, credit is created under the banks.

9) Transaction services is the next criteria, which is not provided by the NBFC, whereas in case of the banks, transaction services are well provided.

Let us understand the definition of the NBFC

NBFC simply stands to mean Non-banking financial company. This is a type of a company which gets registered under the Companies Act, 1956, and is regulated by the Reserve Bank of India, 1934. The NBFC is not typically a kind of a bank, but they are engaged in the activities that deal with lending, which shares similarity with having to provide the credit facilities, managing the portfolios of the stocks and also deal with the activities that involve the transfer of money.

An NBFC deals with the activities that pertain to housing finance, hire purchasing and the infrastructure finance. Deposits are accepted by the NBFC’s, but do not accept the term deposits and the deposits which become repayable on demand.

Certain companies came into existence during the period of mid-1980. SBI Factors, Sundaram Finance and other ICICI ventures are some of the examples that point to some of the popular NBFC’s. An NBFC can be categorized under the following three categories, which are given below:

The first category, relates to asset companies.

The next category is with respect to the companies that extend loan.

The investment companies forms part of the last category.

Let us understand the definition of the Bank

Banks are construed to be such institutions that are in the nature of extending financial services. These financial entities are duly authorized by the government, such that the banking activities can be conducted like that of having to clear the cheques, managing the withdrawal’s pay interest. Other than this, general utility services are extended to the customers.

The financial system as existing in the country is dominated by the banks, which is the apex organization. The economy functions in a smooth manner, with the help of the bank that facilitates the activities between the depositor and the borrowers.

Banks can be categorized into the categories as given below:

In the first place, the banks can be public sector banks.

Secondly, the banks can belong to the private sector.

Lastly, the foreign banks constitute another branch of the bank.

Banks are endowed with the multiple responsibilities, like having to create the credit, the deposits are mobilized and public utility services are extended.

Shareholder is the entity with whom the ownership of the commercial bank is prescribed with. The very motive behind its mode of operation is accorded to making profits.

Chalking out the major differences between the Bank and NBFC

On the grounds given below, the differences between the bank and the NBFC Registration can be jotted down below:

A bank is a kind of a financial intermediary, which is authorized by the government, such that, its aim deals in providing the bank related services to the customers, regardless the fact that whether the banking license is held or not.

NBFC is the entity, whose incorporation takes place under the Indian Companies Act, 1956. In contrast, the bank gets registered under the Banking Regulation Act, 1949.

The deposits which are repayable on demand, are not allowed by NBFC to be accepted. The scenario is much different with respect to the banks, by whom the demand deposits are accepted.

In case of NBFC, foreign investments are allowed up to the mark of 100%. On the other hand, the banks that form a part of the private sector, entail eligibility for foreign investment, wherein it would be not more than the mark touching at 74%.

With respect to the payment and settlement cycle, banks are an integral component, while on the other hand, the NBFC does nit form part of the system.

Reserve ratios must be maintained by the banks, which can either be CRR or SLR. This is in contrast to the NBFC, wherein there is no requirement of maintaining the reserve ratios, which is complete opposite to the NBFC.

With respect to the depositors of the banks, the deposit insurance facility is allowed to them, by the Deposit insurance and credit Guarantee Corporation. With respect to NBFC, such a facility stands unavailable.

Credit is created by banks, while on the other hand, there is no involvement of the NBFC pertaining to credit creation.

Customers can avail the transaction services as provided by the banks. This can include the facilities that work to provide the overdraft facility, deals with the funds transfer and issuance of the travelers’ cheque. NBFC do not extend such services as such.

Conclusion

In the nutshell it can be concluded that the NBFC’s are established with the motive, such that the credit can be extended to such sections of the society that are regarded poor. While on the other hand, the government charters the banks, such that the deposits can be received by the government and credit can be granted to the public.

In comparison to NBFC, the licensing regulations of the bank are more stringent. In addition, a business cannot be operated by the bank, other than having to do the banking business. However, a business can be operated by an NBFC.

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