Banks and Non-banking Financial Companies (NBFC) are two different intermediaries of the financial ecosystem. As people are getting educated on the subject of borrowing, lending and investment, they are exploring more options in the financial domain. This is where both these intermediaries provide options to the customers.
Whether it is for borrowing money for umpteen financial requirements or to invest extra funds, you can choose from these options. However, there are certain differences which may dictate the limits of the functions of each institution, as per the guidelines.
Introduction to Banks and NBFCs
Banks are financial institutions providing various financial services to individual businesses and even the government. With such institutions, you can deposit money and create a bank account to secure your funds.
They also provide lending services like loans and credit cards. Banks also work on guidelines set by the government. The Reserve Bank of India regulates banks under the Banking Companies (Regulations) Act of India, 1949.
Non-banking financial companies, or NBFCs, on the other hand, are financial service providers to the general public. It is characterised as an institution where you cannot open a bank account. Therefore, you cannot deposit unless it is for your fixed deposit.
They are a support structure for individuals who do not qualify for banking facilities. For example, if you have a very low credit score to get a bank credit card, NBFCs have a more flexible credit limit. This way, you can get a credit card.
However, this does not mean they can provide credit cards to anyone, as they are regulated under the Companies Act of 1956.
Differences Between NBFCs and Banks
Here are the key parameters that set banking and non-banking financial companies apart. Knowing this will help you better understand their role in providing financial services.
Regulation
NBFCs are treated like a company under the Companies Act of 1956. Alternatively, banks act on regulation under the Banking Companies (Regulations) Act of India, 1949.
Services Available
Banks can provide all the services NBFCs offer, but the opposite is not true. For example, you can get insurance, apply for a credit card, make payments, and book a fixed deposit with NBFC as well as a bank.
However, some facilities, such as demand drafts and opening savings or current accounts, are limited to banks.
Account Opening
When you mention banking services, the most common option that comes to mind is a bank account.
This service allows you to keep your funds secure with banks, which is readily available for withdrawal. It also helps you earn interest on the deposited amount. This service is only available at banks, not at NBFCs.
Demand Draft
Another key difference is that banks can accept demand deposits from the general public, but NBFCs cannot.
The bank takes money from the customer and provides a demand draft in exchange for a money transfer. The recipient can encash the draft at the nearest bank branch, completing the transaction.
CRR and SLR
When you deposit money in your bank account, it is not stationary. This is because banks use this fund to maintain their cash flow. However, to ensure liquidity or funds for the customers, they must reserve some cash with the central bank.
The Cash Reserve Ratio (CRR) is the percentage of a bank's total deposit amount secured with the Central Bank. Similarly, Statutory Liquidity Ratio (SLR) refers to the percentage of a bank’s net time and demand liabilities in cash, gold, and other approved securities.
These ensure that banks can maintain the demand of the customers without any restrictions.
Cheque Issuance
Only banks are allowed to issue and accept cheques, NBFCs do not provide this facility. This is because it is a legal document protected by the banking laws. This is to avoid any misuse and maintain the regulatory framework.
Deposit Insurance and Credit Guarantee Corporation (DICGC)
This is RBI’s subsidiary that provides insurance for your deposit in a bank. Includes savings account, current account, fixed deposit and recurring deposit of up to ₹5 Lakhs. This corporation is in place to protect the depositor if the bank fails to repay your funds.
Knowing these differences beforehand helps you avoid any confusion and understand the regulations better. You can also analyse the risk and make a better call to deposit your funds under different schemes of a particular entity. This is because a bank provides safety and security, but NBFCs give you flexibility and the option to customise.
On financial marketplaces such as Bajaj Markets, explore the best deals and offers from banks or corporates. For example, you can compare the interest rates for different fixed deposits from banks and NBFCs. In addition, you can check out different insurance options and choose one that meets all your requirements.
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