These days when media is playing a pivotal role in creating awareness of the present financial market, we still need some more facts and information to get clarity between Banks and NBFC’s. While banks and non-banking financial companies (NBFC) both are key financial intermediaries that offer similar services to the customers. The major difference between NBFC and a Bank is that unlike Banks, an NBFC cannot issue self-drawn cheques and demand drafts. As finance is the basic requirement of individuals and businesses, banks alone cannot cater all the sections of the society. That is why NBFC came into being, both in public and private sector, to complement banks in providing finance to people.
Banks are the Reserve Bank of India (RBI) authorized financial institution to conduct the financial activities like accepting deposits, granting credit, managing withdrawals, pay interest, clearing cheques and providing general utility services to the customers. It acts as a financial intermediary, between the depositors and borro
wers that ensures smooth functioning of the economy. Banks can be private sector, public sector or foreign banks.
They are responsible for making loans, creating credit, mobilization of deposits, safe and time bound transfer of money and providing public utility services. Ownership of a commercial bank lies with the shareholder and they are operated with the profit motive. Few popular examples are State Bank of India (SBI), HDFC Bank, ICICI Bank, Axis Bank, Punjab National Bank (PNB) etc.
NBFC escalates to Non-Banking Financial Company. A company registered under the Companies Act, 1956 and regulated by the Central Bank i.e. Reserve Bank of India under RBI Act, 1934. These entities are not banks, but they are engaged in lending and other activities, akin to that of banks like providing loans and advances, credit facility, savings and investment products, trading in the money market, managing portfolios of stocks, transfer of money and so on.
It is indulged in the activities of hire purchasing, leasing, infrastructure finance, venture capital finance, housing finance, etc. An NBFC accepts deposits, but only term deposits and deposits repayable on demand are not accepted by it.
In India, these companies emerged in the early 1990’s. HDFC Ltd, India Bulls, Capital First, Aditya Birla Finance Ltd, IIFL, Fullerton India, Bajaj Finance, Hero Fincorp are examples of popular NBFC’s.
NBFC is divided into three categories, which are:
NBFC sector is growing at the cost of banks that are saddled by bad loans and poor profitability. Banks ability to lend is constrained due to Basel III capital requirements. Many niche NBFCs have come up over the years lending to segments like gold, housing, infrastructure and retail. The Reserve Bank of India has prescribed stringent norms on capital adequacy and NPA in order to bridge the regulatory gaps between NBFCs and Banks, asking NBFCs to maintain minimum capital of Tier I and Tier II of not less than 15% of their risk weighted assets.
|BASIS FOR COMPARISON||NBFC||BANK|
|Meaning||A NBFC is a company that provides banking services to people without holding a bank license.||Bank is a government authorized financial intermediary that aims at providing banking services to the general public.|
|Incorporated under||Companies Act 1956||Banking Regulation Act, 1949|
|Demand Deposit||Not Accepted||Accepted|
|Payment and Settlement system||Not a part of system.||Integral part of the system.|
|Maintenance of Reserve Ratios||Not required||Compulsory|
|Deposit facility||Not available||Available|
|Interest Rates||Base Rate||Marginal cost of fund base lending rate(MCRL)|
|Cost of Funds/Lending||Higher||Lesser|
|Number of branches||Ristricted||Unristricted|
As far as lending is concerned banks tend to target corporate as well as retailers. On the other hand NBFCs are more geared towards the retail sector. For example, this could be in vehicle finance, consumer loans etc. You do not see them lending to big power projects as an example. Another difference is in issue of credit cards. Banks tend to frequently issue credit cards. NBFCs do not. Last but not the least Banks works on Marginal cost of fund base lending rate (MCRL) and NBFC still works on base rates. Costs of funds of the banks are lesser as compared with NBFC, which makes banks to lend at the lower interest rates.
Now we all know that both banks and NBFCs accept fixed deposits. However, there are some differences between both. For example, NBFC fixed deposits are generally rated by the rating agencies in the country. On the other hand the fixed deposit of banks is not rated by the rating agencies.
Another difference between the NBFC and bank fixed deposit is the insurance. Bank fixed deposits are insured; while NBFC fixed deposits are not insured. In fact, if there is a default of Rs 1 lakh and less the Deposit Insurance and Credit Guarantee Corporation of India pays the insurance amount on a bank deposit. Considering this risk , the NBFC offers the higher returns on the deposits as compared with the Banks.
NBFC’s are mainly established to grant credit to the under served section of the society, whereas the banks are chartered by the government to receive deposits and grant credit to the public. The licensing regulations of a bank are more stringent than that of an NBFC. There are restrictions & regulations to open new bank branches where as NBFC are free to expand their geographical presence. Costs of funds of the banks are lesser as compared with NBFC, which makes banks to lend at the lower interest rates. Moreover, a bank cannot operate any business other than the banking business, but an NBFC can operate such business.