Key Differences between NBFCs and Banks in India www.deekpay.com

Non-Banking Financial Companiesand the banks areIndiaAn integral part of the financial sector, providing a wide range of financial services to individuals and businesses. Banks and non-bank financial companies are two important financial intermediaries in any financial system. Banks are the traditional entities that accept deposits from the public and make loans to the public, while non-banking financial companies provide a wide range of financial services to consumers without a banking licence.

Whilst there are some similarities between the two, they also exhibit significant differences in terms of regulation, operation and range of services provided. This paper provides an in-depth look at the NBFC and banks and considers the main differences between theReserve Bank of India (RBI) on the latest regulatory developments.

NBFC and bank definitions

NBFC

Non-Banking Finance Companies (NBFCs) are financial institutions that provide bank-like services but do not hold a banking licence. They are registered under the Companies Act, 1956 and are regulated by the Reserve Bank of India.NBFCs can engage in activities such as lending, leasing, instalments, investments and other financial services.

Functions of NBFCs in India

Non-Banking Financial Companies (NBFCs) perform a variety of functions, including

Loans and credit: NBFCs offer flexible lending solutions and credit facilities to individuals and businesses for personal, vehicle, housing, etc. Asset finance: NBFCs engage in asset finance to finance the purchase or lease of assets such as machinery, equipment, vehicles or real estate. Investment and Advisory Services: Many NBFCs provide investment advisory, portfolio management, and risk assessment services. NBFCs may also facilitate investments in securities, mutual funds and other financial instruments. Leasing and Hire Purchase: NBFCs are involved in leasing and hire purchase activities, which allow individuals and businesses to acquire assets without having to make full upfront payments. Microfinance: Some NBFCs specialise in microfinance, providing small loans and financial services to low-income individuals, self-help groups and microenterprises. Factoring and invoice discounting: NBFCs provide factoring and invoice discounting services. These services provide immediate liquidity to enterprises to enable them to meet their working capital requirements. Foreign exchange services: NBFCs also provide foreign exchange services to facilitate currency exchange and remittance transactions.

Read more:Non-Banking Financial Corporation of India NBFC

banks

Banks are financial institutions that provide a variety of financial services to individuals, businesses and governments. They act as intermediaries between depositors, who have surplus funds, and borrowers, who need funds for various purposes. In India, banks are regulated by the Reserve Bank of India (RBI), the central bank of India, under the Banking Regulation Act, 1949.

Functions of the Bank of India Accepting deposits: Banks accept deposits from individuals and businesses. Depositors can keep their money safely in the bank, earn interest on their deposits, and have easy access to banking services. Loans and credit: Banks provide loans and credit facilities to individuals and businesses for a variety of purposes, such as personal loans, home loans, car loans, working capital loans and project finance. Payment Services: Banks facilitate payment transactions. Customers can make payments, transfers and financial transactions easily and securely. Safekeeping of valuables: Banks provide safe deposit boxes where customers can safely store valuables such as documents, jewellery and other assets. Foreign Exchange Services: The bank facilitates currency exchange, wire transfers and foreign currency accounts. Investment and Wealth Management: The bank offers investment products such as mutual funds, fixed deposits and government bonds and assists customers in managing their investment portfolios. Trade finance and letters of credit: Banks issue letters of credit, guarantees and financing programmes to support importers and exporters in their trade transactions. Financial intermediation: Banks collect deposits from individuals and businesses and use these funds for lending and investment activities. Treasury operations: Banks provide treasury services such as foreign exchange transactions, money market operations, investment in government securities, and management of the bank's financial assets and liabilities.

Recommended Reading:Reserve Bank of India RBI

Key differences between NBFC and banks

Characteristics NBFC Bank Definition A company registered under the Companies Act, 1956, engaged in financial activities without a banking licence. Financial institution authorised by the Government of India to accept deposits from the public and lend money. Statute Primarily regulated by the Reserve Bank of India under the Reserve Bank of India Act, 1934. Regulated primarily by the Reserve Bank of India under the Banking Regulation Act, 1949. Acceptance of Deposits Fixed deposits can be accepted under certain conditions. Cannot accept demand deposits. Can accept demand deposits and time deposits. Payment settlement systems are usually not part of the payment and settlement system. Part of the payment and settlement system. Credit creation has limited credit capacity compared to banks. Credit can be created through lending activities. Capital Adequacy Capital adequacy requirements vary according to the NBFC category. Subject to stringent capital adequacy requirements as per Basel standards. Liquidity Liquidity requirements are less stringent as compared to banks. Higher liquidity ratios are maintained in handling demand deposits. Risk Management Risk management practices vary depending on the activities of NBFC. Exposure to various risks requires a sound risk management framework. Ownership structure can be public, private or foreign owned with less stringent ownership restrictions. Ownership can be public, private or foreign owned, but there are specific ownership restrictions. Taxes Subject to income, corporate and other applicable taxes. Subject to income, corporate and other applicable taxes. Services Provided Primarily engaged in lending and borrowing activities, but may also provide other financial services such as investment and insurance on a limited basis. Wide range of services including deposits, loans, credit cards, debit cards, internet banking and other financial services. The base customer client base may vary depending on the area of focus of the NBFC. Large customer base, including individuals, businesses and organisations.

The table above provides a comprehensive overview of the key differences between NBFCs and banks. Some other points to consider:

Regulatory oversight: Banks operate under a stricter regulatory framework than NBFCs. This is due to the systemic importance of banks and the protection of depositors' interests. Deposit Insurance: Bank deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which provides protection to depositors up to a certain limit.NBFC deposits are usually not insured. Payment and settlement systems: Although the NBFC has expanded its role in payment systems in recent years, banks still dominate this area. Credit ratings: NBFCs are often required to maintain credit ratings that reflect their creditworthiness and risk profile. Recent developments at RBI: RBI has introduced various measures to regulate NBFCs more effectively, including stricter capital adequacy norms, liquidity requirements and asset liability management guidelines.

concluding remarks

In summary, while both banks and NBFCs provide financial services, they operate differently. NBFCs generally specialise in lending operations for corporates, whereas banks usually accept and disburse loans. In recent years, the financial needs of individual consumers in India have also been met by NBFCs. Moreover, banks are mostly engaged in stock trading while providing financial guidance to their customers. NBFCs, on the other hand, offer a wide range of financial services, including securities, insurance and investments. Numerous laws and regulations enacted by the Government of India also control banks to a large extent.NBFCs follow the guidelines set by the Reserve Bank of India.