When it comes to investment, savings, or borrowing of funds, the two major financial institutions people look up to are banks and Non-Banking Financial Company (NBFCs). Both institutions are involved with the loan business and the acquisition of stocks/shares/bonds/securities/debentures issued by the Government of India. However, a comparison between the two reveals major differences in their features. This article explores NBFC and bank difference, so borrowers can make an informed decision before pooling in or drawing out funds.  

What Is an NBFC?

An NBFC or Non-Banking Financial Company is a company registered under the Companies Act, 1956. It is controlled by the Reserve Bank of India under the RBI Act, 1934. Like banks, these firms provide banking/financial services to individuals, such as dealing in the stock market, regulating portfolios, money transfer, administering loans and advances, credit facilities, investment commodities, saving and so on. NBFCs are further categorized as Asset Companies, Investment Companies, and Loan Companies. 

What Is a Bank?

Authorized under the Reserve Bank of India, a bank offers financial/banking services to the general citizens. These are financial organizations sanctioned by the Government to manage activities, such as granting credit, accepting deposits, clearing cheques, managing withdrawals and offering loans, and delivering general utility services to customers. Banks are responsible for controlling or balancing the country’s overall economy. It serves as a mediator between the borrowers and depositors, which guarantees the economy’s effortless functioning.

NBFC and Bank Difference: A Complete Comparison

Banks and NBFCs differ from each other on various parameters. If you are not sure how to compare the two, here is a look at NBFC and bank difference – 

Particulars	Banks	NBFCs (Non-Banking Financial Companies)
Meaning	A bank is a government-licensed financial intermediary offering banking services to the public	An NBFC is a company offering banking services to individuals without any Government authorization
Administered Under	Banking Regulation Act, 1949	Companies Act 1956
Foreign Investment	Up to 74% allowed for private banks	Up to 100% allowed
Demand Deposit	Accepted	Not Accepted
Payment and Settlement System	An integral part of the system	Not a part of the system
Deposit Insurance Facility	Available	Not Available
Maintenance of Reserve Ratios	Required	Not required
Credit Creation	Provided	Not Provided
Transaction Services	Provided	Not Provided

NBFC and Bank Difference – Key Points to Remember

The banks vs NBFCs key differences are mentioned below –

Authorization

Banks are government-sanctioned financial institutions while NBFCs are registered under the Companies Act, 1956, and need no license or authorization from the government.  

Foreign Investment

Up to 74% of foreign investment is allowed for private-sector banks while 100% of financial investment is granted for NBFCs. 

Demand Deposit 

Banks acknowledge demand deposits as a fund from where customers can withdraw deposits at their convenience. However, NBFCs do not acknowledge such drafts for financial transactions. 

Reserve Ratio Maintenance

The Central Bank, RBI holds the required reserve as deposits or cash stored physically in the banks in order to regulate monetary supply in the country. NBFCs do not uphold reserves to function in the economy. 

Deposit Insurance System

Banks are free to utilize the deposit insurance structure to safeguard the clients’ money while NBFCs do not have access to this facility.

Payment and Balance System

Unlike NBFCs, banks are an integral part of the payment and settlement system.

To know more read NBFC Vs Bank 

Summary

Banks and NBFCs have some similarities and a number of distinctions. While both are formulated to help the common people manage/invest/withdraw/deposit their money, NBFC and bank difference is crucial to understand as these will help you make the right choice as per your financial goals.