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What is NBFC?

In banking terminology, a NBFC i.e. a non-bank financial institution is a financial institution which is not governed or supervised by a national or international banking regulatory agency. Also, NBFC does not have a full banking license and plays a vital role in strengthening the economy because they provide multiple alternatives for capital investment and also act as backup in case of intermediation fail.

NBFC have a very significant role to play in the Indian financial system and offers most of the banking services to their clients, namely loans and credit facilities, retirement planning , underwriting stocks and shares, private education funding, wealth management, advice on merger and acquisition activities etc. Also with their kind of role and service, they give a sense of competition amongst financial institutions. Whilst bank offer their services as a packaged deal, NBFCs will tailor made their services in order to meet the specific needs and requirements of their clients and thus gets an edge over the banks.

What is NBFC?

In India, NBFCs are registered under the Companies Act 1956 and its working and operations is regulated as per the norms and regulations outlined by the Reserve Bank of India. As per the new norms published by the RBI, NBFCs cannot outsource core management functions like internal audit, management of investment portfolio etc. Also, RBI has given limited freedom to the NBFCs in terms of access to customer information and only that much information is given which is required to perform the outsourced function.

What is the difference between bank and NBFCs?

difference between bank and NBFCs

Although NBFCs perform same functions as a bank but there are lot many ways in which they differ from banks, such as:

  • A bank can accept demand deposits whereas a NBFC cannot.
  • A bank can issue cheques drawn on itself but a NBFC cannot.
  • A bank is required to maintain Reserve Ratios whereas it is not the case with a NBFC.
  • A bank is a part of the payment and settlement system whereas a NBFC is not.
  • A bank can indulge primarily in Agricultural, Industrial Activity, Sale-Purchase, Construction of Immovable Property whereas a NBFC cannot.
  • A bank need to have a bank license to provide banking services whereas a NBFC can go ahead with the same without having a bank license.
  • Deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is available for the bank whereas same is not available with the NBFC.