Financial Institutions: Banks VS NBFCs
Pushpanjali • May 2, 2023
Banks VS NBFCs: What’s the best choice for Home Loan?
Financial institutions cater to every essential sector of society. They have an impact on society as a whole, including corporations and governments. These institutions help in mobilizing the funds from individuals towards the economic development of the country. When it comes to money, the best places to go are banks and NBFCs. But what are the similarities and differences between them? Banks and Non-Banking Financial Companies (NBFCs) are two distinct types of financial entities that are subject to separate rules and regulations. An NBFC, or non-bank financial institution, is a private firm that offers similar services to banks but lacks a banking license.
Financial institutions accept deposits and make loans to individuals and businesses. Small businesses and individuals can turn to NBFCs for business loans and lines of credit, as opposed to traditional financial institutions like banks, which rely on consumer deposits to fund loans and other forms of credit. Non-banking financial companies are necessary because people from all walks of life need access to money in varying formats.
What is a Bank?
Bank is a financial institution where customers deposit money and get an interest rate for that. They then lend out this money to borrowers and mobilize the fund. RBI(Reserve Bank of India) regulates banks due to the vital role they play in the financial system and economy. Banks in most countries operate under a system called fractional-reserve banking, in which they only need to keep on hand enough liquid assets to cover a fraction of their daily commitments. They also provide a range of other financial services, such as issuing credit and debit cards, facilitating payments and settlements, and offering insurance and investment products.
What does “NBFC” stand for and mean?
NBFC full form is Non-Banking Financial Companies. These companies are not banks but yet deal in finance and offer their services to the general public generally where banks are not able to fulfill the demand of customers. They are required to be registered with the Reserve Bank of India (RBI) in accordance with the Companies Act of 1956 and are subject to regulation by the RBI. NBFCs are granted license to operate in a particular manner by the RBI.
NBFCs are particularly significant in countries that are still developing, such as India, where the majority of the population lives in rural areas. Typically, commercial banks are not accessible remotely in some parts of the country. This is where non-bank financial companies (NBFCs) come into play. There are many such gaps which are fulfilled by NBFCs.
Following are the benefits of NBFC:
- Fulfill rising demand
- More efficient service
- Have knowledge on wealth management and manage portfolio
- Liquidity for financial system
- Supports when banks fail to support
Basic differences between banks and NBFCs-
- In India, banks get their operating license from Reserve bank of India and are regulated by Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949
Whereas
NBFCs in India get their operating license from the Companies Act of 1956 or the Companies Act of 2013 and are usually regulated by the Reserve Bank of India Act of 1934. - Another important difference between banks and NBFCs is in terms of deposits. Banks are allowed to accept demand deposits whereas NBFCs cannot do the same. However, later on, it was allowed by the RBI to accept deposits. So, banks get their money from deposits whereas NBFCs get their assets from Assets Under Management (AUM) like bonds and so on, or in some other cases, they might borrow it from other banks.
- Banks and NBFCs (Non-Banking Financial Companies) both play a crucial role in the economy by providing financial services to individuals and businesses. Banks are highly regulated financial institutions that accept deposits, lend money, and provide other financial services, while NBFCs offer banking services without a banking license.
Overall, both banks and NBFCs have their strengths and weaknesses. The choice of financial institution depends on the specific needs of the customer. Banks offer safety and security, while NBFCs offer flexibility and customization. Careful consideration of the advantages and disadvantages of each option is crucial before reaching a decision.
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