13 Key Difference Between NBFC and Banks That You Should Know

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Anyone who reads newspapers or engages in any financial transactions would definitely have heard of the term NBFC. The term NBFC Stands for Non Banking Finance Company.

Surely, you will have availed services of one or more NBFCs such as buying an insurance policy or taking loans to finance a home or vehicle.

 The commonest form of saving money and engaging in financial transactions in India is through banks.

However, you can get some excellent savings, investment and loan products at very attractive rates from NBFCs too. Hence, let us study the difference between an NBFC and bank.

difference between nbfc and banks

NBFC Backgrounder:

India is home to over 12,000 Non-Banking Financial Companies (NBFCs) and over 1,000 banks, in the Public Sector Undertaking (PSU), private, cooperative, regional, local, small finance and payment categories.

This is because India is a very large economy- ranking at No-4- in the world.

India’s population is estimated at 1.35 billion that resides in urban, semi-urban and rural areas.

Hence, the requirement for financial services in India is as diverse as its people. Consequently, banks alone cannot handle the Herculean task of providing this very wide range of financial services.

This is where NBFCs come in. They are a very important and integral part of the Indian economy and provide different types of financial services that suit everyone.

Types of NBFCs in India

There are different types of NBFCs in India. Similar to banks, they are licensed by Reserve Bank of India and operate under laws of the Indian government.

Below is the list and number of different types of NBFCs that are currently operating in this country.

  1. Asset Finance Companies- 397
  2. Core Investment Companies- 50
  3. Infrastructure Development Companies– 4
  4. Factors-6
  5. Non Deposit Accepting- 11,055
  6. Non Deposit Systematically Important- 240
  7. Micro Finance Institutions– 82
  8. Asset Reconstruction– 24
  9. Public Deposits- 16

Difference Between NBFC and Bank:

There are some core differences between NBFCs and banks. A large number of PSU and private banks also operate NBFCs.

  1. You can open a Savings or Current Account at banks. NBFCs are not licensed to open Savings or Current Accounts.
  2. Banks issue ATM cards. NBFCs are not authorized to issue ATM cards.
  3. Fixed Deposit schemes are available from bank and NBFCs. While banks offer interest on FDs based on rates stipulated by RBI, an NBFC is free to offer higher or lower interest rates on Fixed Deposits.
  4. All loans given by banks are subject to interest rates fixed by RBI. Loans from NBFCs also comply with RBI laws but have the autonomy to charge higher or lower.
  5. Banks do not offer asset management services. However, banks and private companies offer the service through their Asset Management Companies.
  6. Banks cannot directly offer insurance schemes. Specialized NBFCs like Life Insurance Corporation of India (LIC) and others can offer insurance policies. Banks can offer these only in collaboration with insurers.
  7. Banks do not offer Mutual Funds and Systematic Investment Plans. However, NBFCs operated by banks and other companies offer Mutual Funds and SIPs for investments.
  8. Asset restructuring for individuals and companies is not provided by banks. NBFCs are permitted to offer this service.
  9. Your deposits with banks are insured up to a maximum of Rs. 100,000 by Deposit Insurance and Credit Guarantee Corporation of India. Hence, RBI guarantees your money. With NBFCs, your deposits are prone to market risks and in some cases, frauds.
  10. Banks have to comply with the Banking Regulation Act 1949 of India. NBFCs have to comply with Companies Act 1956.
  11. Savings schemes offered by banks are not rated by agencies. However, rating agencies assess and rate schemes offered by NBFCs for their risks.
  12. Bank loans are targeted at individual customers, families and businesses. NBFCs generally offer loans only for retail customers, for example, smart-phones bought on Equated Monthly Installments.
  13. India’s Ministry of Finance in collaboration with RBI appoints CEOs, Chairperson, Managing Directors and other key personnel of PSU banks while those of private and cooperative banks are often appointed by Board of Directors. On the other hand, NBFC heads are appointed in-house by the company management.

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 In Conclusion:

It is important to note that investing in NBFCs is also safe, provided you select the right ones and read all documents related to schemes.

In fact, NBFCs are playing a very major role in helping ordinary Indians get the maximum advantage of their savings by offering high-return products.

 NBFC is also funding giant infrastructural projects in India such as highways, ports and airports since they possess capabilities to raise the required capital from various sources.

In remote areas of India, NBFCs are playing a vital role in providing micro-finance for economically underprivileged sections of the society, to launch own business.

Some NBFC specializes in the financial empowerment of women and offers schemes and loans to help them own homes or start a small business.

Thus NBFCs are a very important and integral part of the Indian economy. They provide everyone from large companies and government to individuals with financial solutions.

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