Differences Between NBFCs and Banks

Non-Banking Financial Companies (NBFCs) perform functions similar to banks, mainly lending and investment, but they differ from banks in several fundamental ways. These differences arise from the distinct regulatory framework, scope of activities, and systemic roles assigned to NBFCs and commercial banks.

Nature of business

Both banks and NBFCs engage in lending and investment, but NBFCs operate under a different regulatory framework and play a limited systemic role compared to banks.

Deposit-taking

• Banks: Can accept demand deposits (savings/current accounts) withdrawable anytime.
• NBFCs: Cannot accept demand deposits. Only a few deposit-taking NBFCs (NBFC-D) may accept time deposits, subject to Reserve Bank of India (RBI) approval, size limits, minimum maturity, and investment-grade rating.

Payment & settlement

• Banks: Core participants in payment systems; issue cheques, enable transfers, drafts, etc.
• NBFCs: No direct access to payment systems; cannot issue cheques or maintain transaction accounts; rely on banks.

Deposit insurance

• Banks: Deposits insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) up to the prescribed limit.
• NBFCs: Deposits not insured, hence stricter limits on deposit-taking.

Credit creation

• Banks: Create credit through fractional reserve banking, expanding money supply.
• NBFCs: Cannot create money; lend only from owned or borrowed funds.

Reserve requirements

• Banks: Must maintain CRR and SLR.
• NBFCs: Not subject to CRR/SLR; deposit-taking NBFCs maintain limited liquid assets.

Regulation

• Banks: Regulated under Banking Regulation Act, 1949; require banking licence; face strict supervision.
• NBFCs: Regulated under RBI Act, 1934; require registration; historically lighter regulation, though large NBFC norms have tightened.

Market access

• Banks: Full access to interbank money market, forex market, and trade finance.
• NBFCs: Limited access; raise funds via CPs, debentures; forex/interbank access only if authorised.

Priority sector lending

• Banks: Mandatory priority sector targets.
• NBFCs: No direct targets; loans by some NBFCs (e.g. MFIs) may count toward banks’ targets.

Ownership & FDI

• Banks: Strict ownership and foreign shareholding limits.
• NBFCs: Up to 100% FDI under automatic route; wider promoter base.

Use of “bank” & services

• Banks: Can use “bank” in name; offer full banking services.
• NBFCs: Cannot use “bank”; activities mainly limited to lending and investment.