What is the Difference Between a Bank and NBFC

Financial institutions play a major role in the Indian economy, they help boost the spending power of individual and overall growth. The primary types of financial institutions are Banks and NBFCs so called Non Banking Financial Institutions. Both have the objective of lending loans to end consumers but there is a significant difference such as NBFC conduct business activities without a banking license whereas a bank is approved by the government. Let’s understand a few more things. Understanding these differences can help individuals and businesses make informed financial decisions.

Let’s understand the difference between a bank and NBFC

What is a Bank?

A bank is a place where you can put your money (deposit) and borrow money when you need it (borrow). Banks are important because they help manage our money and provide services like savings accounts, fixed deposits (where you save money for a set time), loans for personal needs or businesses, and other financial help.

What are the functions of a Bank?

1. Accepting Deposits: Banks accept various types of deposits, such as savings, current, and fixed deposits.

2. Providing Loans: Banks offer different kinds of loans, including personal, home, and business loans.

3. Payment and Settlement: Banks facilitate payment and settlement systems through cheques, demand drafts, and electronic transfers.

4. Investment Services: Banks offer investment services like mutual funds, bonds, and insurance products.

What are the types of Banks

1. Public Sector Banks: Owned by the government (e.g., State Bank of India (SBI), Punjab National Bank).

2. Private Sector Banks: Privately owned and managed (e.g., HDFC Bank, ICICI Bank).

3. Foreign Banks: Operate as branches of foreign banks in India (e.g., Citibank, HSBC).

4. Regional Rural Banks: Focus on rural areas to provide banking services to small farmers and artisans.

Who regulates the Banks?

Banks are regulated by the Reserve Bank of India (RBI). The RBI ensures that banks follow guidelines related to interest rates, reserves, and lending practices.

Understanding NBFCs

What is NBFC?

A Non-Banking Financial Company (NBFC) is a place where you can get financial services similar to a bank, but it's not exactly a bank.

Unlike banks, NBFCs generally cannot accept demand deposits (like savings accounts) and they can't open regular bank accounts for the public. They're also restricted in who they can lend money to, except for loans secured by gold or used to buy certain things like equipment or cars. They have to pay interest on the deposits they accept from the public and follow other rules too.

What are the functions of NBFC?

1. Providing Loans and Advances: NBFCs offer personal loans, business loans, and loans against property.

2. Asset Financing: NBFCs provide finance for the purchase of assets like machinery and vehicles.

3. Wealth Management: NBFCs offer wealth management services, including portfolio management and advisory services.

4. Insurance Services: Some NBFCs provide insurance products also.

What are the types of NBFC?

1. Asset Finance Companies (AFCs): Specialize in financing physical assets like automobiles.

2. Loan Companies: Focus on providing loans and advances.

3. Investment Companies: Deal with the acquisition of securities.

4. Infrastructure Finance Companies (IFCs): Provide long-term finance for infrastructure projects.

Regulatory Framework for NBFCs

NBFCs are supervised by the Reserve Bank of India (RBI), but they have separate rules from banks. They must meet standards for how much money they keep on hand, how they classify their assets (like loans), and how much they set aside for potential losses. These rules help ensure they operate safely and manage risks properly.

Key Differences Between Banks and NBFCs

Advantages and Disadvantages of Banks and NBFCs

Summary