Difference between NBFCs and Banks

Introduction

You often heard Bank and NBFCs both is a key financial intermediary that offers more or less similar kind of services to the customers. NBFC does activities like they make the investment and lends which are akin to the banks. Is ICICI bank and Mahindra Finance are same at one end?

No, Banks and NBFCs differs in many functional areas which are discussed in this write – up below-

1. Demand deposit

Demand deposits or DD is a deposit which is withdrawn by an individual at any time from the Financial Institution. NBFCs are not permitted to accept the Demand Deposits for any financial transaction. However, Banks widely use these demand deposits to make their payments

2. Government Permission

The first and the key difference between a NBFCs and Bank is their level of authorization. Where NBFCs are not required to hold a bank license in order to give banking service to the public banks are authorized by the governments where their ultimate objective is to serve the general public.

3. Deposit Insurance Policy

NBFCs are not allowed to avail the service of deposit insurance which is facilitated by the Deposit Insurance and Credit Corporation but banks are certainly enjoy this facility in order to safeguard their client’s money.

4. Payment and Settlement System

NBFCs are not allowed to form a part of the payment and settlement system whereas Banks are considered to be the core of payment and settlement system.

5. Foreign Direct Investment

FDIs up to 100% is allowed in NBFCs whereas banks of the private sector are only eligible for Foreign Direct Investment that would not be more than 74%.

6. Maintenance of Reserve Ratio

Maintenance of Reserve ratio means reserving that part of the depositor’s balance in a fixed ratio that should be kept by the bank as cash according to the central bank. There is no requirement for NBFCs to maintain the reserve ratio but it is mandatory for banks to do so.

7. Services and activities

Bank offers service like credit creation, overdraft facility, traveler’s cheque, transfer of funds etc to their customers but such kind of services are not provided by NBFCs.

Conclusion

NBFCs are mainly incorporated to grant a loan to the under-privileged section of the society whereas this does not apply to banks. Moreover, the bank cannot operate any business other than banking business but NBFCs can operate such business.

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