8 The key distinctions in Banks and NBFCs

An overview of Banks and NBFCs

Banking institutions along with NBFCs (Non-Banking Financial Corporations) are key financial intermediaries across the globe. Both share many similarities and distinctions. But, I’ll cover the 8 major distinctions between NBFCs and banks in the present guide. Before proceeding, let’s take an overview of their definitions.

• Banks banks are financial institutions that have been given approval by governments to conduct banking functions like regulating check cashing, clearing withdrawals and paying interest, making deposits, lending credit and supplying consumers with basic utilities.
• The NBFCs are: They are companies aren’t banks but they engage in lending, as well as other functions similar to banks including managing stocks, moving money in advance and loans credit facilities as well as saving and investing products along with trading and transactions on the market for money.

Banks are widespread throughout India. But, they cannot take care of every single aspect that is that is a part of society’s finances. Due to this, NBFCs were established in the private and public sectors to assist banks in lending to individuals. According to Statista Reports 2022 there exist 9680 registered NBFCs all over India.

8 key distinctions in Banks as well as NBFCs

1. Constitution & Authorization

A bank is regulated in accordance with the Banking Regulation Act of 1949 and an NBFC is created pursuant to the Indian Companies Act of 1956. The word “bank” is a reference to a legal financial intermediary who is trying to provide banks to the general public. Furthermore there is a Reserve Bank of India (RBI) oversees these financial bodies.

2. Duties

There are banks in the private, public or international sectors. They are responsible for lending, establishing credit using deposits, moving money in a safe and timely manner as well as providing public utilities. Commercial banks are run in order to earn money as well as their shareholders. shareholders. In contrast NBFCs are Investment firms, loan lenders etc.

3. Foreign Investment Allowance

The Reserve Bank of India regulates NBFC activities within the framework in the RBI Regulation Act of 1934. The NBFCs are allowed to invest 100% of their money which is a lot more than banks. Banks are allowed to put up 74% of the money while NBFCs are allowed to invest 74%.

4. Maintaining the Reserve Ratio

The reserve ratio represents a percentage of the depositor’s account balance that is held at the hands of the banks that cash. CRR and SLR are two examples. The NBFCs are able to operate without having reserve ratios. However, banks need to be able to do this since it will affect the supply of money in the country in the long run.

5. Deposit Insurance system

If a bank is insolvent or is not able to paying its depositors, the those who have deposits are covered through deposit insurance. Banks can certainly make use of the deposit insurance structure that is provided through the company that offers deposit insurance company and the credit guarantee (DICGC) firm to safeguard the funds of their customers. However, NBFCs aren’t included in this program.

6. Ratings

NBFC Deposits can be rated to demonstrate the credibility or legitimacy that the loan is legitimate. However bank deposits don’t need any rating since they are able to be repaid upon the demand.

In comparison, banks are preferred due to their security. For those who want high returns and prepared to take risks should consider NBFCs. A majority of loans with high-quality are AAA-rated. The more a loan’s rating is higher the greater the security and quicker payment of interest and principal.

7. Fixed Deposits

Fixed deposit can be described as a product that is provided by both organizations. However, the different between the two is NBFC fixed-rate deposits are often evaluated by our country’s rating agencies, whereas bank fixed deposits do not require any rating. Like we said, NBFC fixed deposits are not insured, which is the only reason for this distinction.

8. Other Services

In terms of services when it comes to services, there is one that stands out. Demand Deposit (DD) option is by far the main difference that differentiates Banks from NBFCs. Banks are able to make demand drafts or accept fixed deposits upon demand, whereas NBFCs do not able to offer the same. A small percentage of NBFCs in India are permitted to accept deposit with fixed terms (not cash-payable or demand-repayable deposit). However, they are bound by the RBI’s regulations.

Overdraft, money transfer as well as on-demand withdrawals are among the banking services that banks generally provide. However none of these services are offered by NBFCs. They provide bonds, investments hire-purchase, loans and various related services to lending. Both organizations have different restrictions on interest rates. The NBFCs are able to be charged a maximum of 12.5 percent per year (Ceiling price).