A Non-Banking Financial Company's primary business activities include lending or financial leasing or hire purchase, accepting deposits, or acquiring shares, stocks, bonds, and so on. They must obtain a license from the RBI before starting any business, and they are regulated by the RBI. NBFCs can be deposit-taking or non-deposit-taking based on their liability. NBFCs can fall into one of the following categories:
The Loan Company
Asset Finance Corporation
What exactly is a bank?
Banks provide credit, demand deposits, withdrawals, interest payment, cheque clearing, and other general utility services to their customers.
They dominate the country's financial sector and act as a financial intermediary between borrowers and depositors.
Differences Between an NBFC and a Bank
Now that we've examined the activities of each of these institutions separately, let's look at how NBFCs and banks differ in nature and function.
NBFCs are formed as companies under the Indian Companies Act, 1956, and then apply for NBFC licenses from the RBI. Banks, on the other hand, are registered under the Banking Regulation Act, 1949.
Banks are government-approved financial intermediaries that are authorized to accept deposits and extend credit to the public. NBFC, on the other hand, is a company that provides banking services to smaller segments of society without holding a bank license.
Banks are permitted to accept demand deposits, but NBFCs are not permitted to accept demand deposits.
Because NBFCs are formed as corporations under the Companies Act of 2013, they are permitted to accept up to 100% foreign investment. However, banks can only accept foreign investments up to 74% of their total capital.
NBFCs, like banks, are not an essential part of the country's payment and settlement cycle.
Banks are required by the RBI to maintain reserve ratios such as CRR or SLR. NBFCs are not subject to this requirement.
Deposit Insurance and Credit Guarantee Corporation (DICGC) offers deposit insurance to bank depositors. In the case of NBFC, such a facility is not available.
NBFCs do not create credit for their customers in the same way that banks do.
Banks offer services such as overdraft protection, traveler's checks, fund transfers, and so on. NBFC does not provide such services.
Unlike banks, NBFCs are not permitted to issue cheques drawn on themselves."""