What is a Non-Banking Financial Company (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.

What is NBFC?

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.

NBFCs are registered under the Companies Act 1956 in India, and its working & operations are 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 difference between Banks & NBFCs?

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

  • NBFCs cannot accept demand deposits.
  • NBFCs do not form part of the payment and settlement system.
  • NBFCs cannot issue cheques drawn on itself.
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.
  • NBFCs are incorporated under company act of 1956 while banks are incorporated under banking companies act.

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