NBCFs and Banks both act as
financial intermediaries and offer fairly similar services. But, there are many
points of difference. There are very stringent licensing regulations for banks
as compared to NBFCs.
What is an NBFC?
Principal business activities of a Non- Banking Financial Company consist of
lending or financial leasing or hire purchase, accepting deposit or acquisition
of shares, stocks, bonds, etc. To initiate any business they are required to
acquire a license from RBI and they are regulated by RBI.
Based on Liability, NBFC can
be Deposit-taking or Non-deposit taking. NBFC can be of following categories:
Loan Company
Asset Finance Company
Investment Company
What is a Bank?
Bank perform activities like
granting credit, demand deposits and provide withdrawals, interest payment,
cheque clearing and oyher general utility services to their customers.
They dominate the financial sector
of the country and provide a link as a financial intermediary between borrowers
and depositors.
Key Differences between NBFC and
Bank
Now that we have separately analyzed the activities undertaken by both these
institutions, let us analyze how NBFCs and banks differ in
nature and their functionalities.
NBFC is first incorporated as a
company under the Indian Companies Act, 1956 and then apply for NBFC license
from RBI, on the other hand bank is registered under Banking Regulation Act,
1949.
Banks are government authorized
financial intermediary which are chartered to receive deposits and grant credit
to the public. However, NBFC is a company that provides banking services to
smaller sections of the society without holding a bank license.
Banks are authorized to accept
demand deposits, but NBFCs are not authorized to accept deposits which are
repayable on demand.
As NBFCs are established as
companies under Companies Act, 2013 they are allowed to accept up to 100%
foreign investments. But, banks are can only accept foreign investments up to
74% of their total amount.
Like a bank, NBFCs do not form an
integral part of payment and settlement cycle in the country.
RBI mandates the maintenance of
reserve ratios like CRR or SLR by banks. NBFC have no such obligation.
Deposit Insurance and Credit
Guarantee Corporation (DICGC) provide deposit insurance facility to the
depositors of banks. Such facility is unavailable in the case of NBFC.
NBFC is not involved in credit
creation like banks do for their customers.
Banks provide services like
overdraft facility, the issue of travellers cheque, transfer of funds, etc.
Such services are not provided by NBFC.
NBFCs are not allowed to issue
cheques drawn on itself like banks can.
Article Source: Danish Shaif
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