NBFC vs. Banks in India: Key Differences

The financial system of India consists of various institutions that provide credit and financial services to individuals and businesses. Among these, banks and Non-Banking Financial Companies (NBFCs) play a crucial role in supporting economic development and improving financial inclusion.

Banks operate as traditional financial intermediaries that accept deposits from the public and provide loans while also facilitating payment and settlement systems. These institutions function under strict regulations of the Reserve Bank of India and are an integral part of the country’s banking system.

On the other hand, NBFCs are financial institutions that offer various lending and financial services similar to banks but do not hold a full banking license. They play an important role in providing credit to sectors that are often underserved by traditional banks, such as small businesses, rural borrowers, and emerging industries.

Thus, while both banks and NBFCs contribute significantly to the financial sector, they differ in terms of regulation, services offered, deposit acceptance, and operational scope. Understanding these differences helps in recognizing the unique role each institution plays in strengthening the Indian financial system.

BANK

Bank is the one of the most important institutions in financial system. Banks help individuals, businesses, and governments in managing their finances efficiently. It acts as an intermediary between people who have surplus money (depositors) and those who need money (borrowers).

Banks are regulated under the Reserve Bank of India (RBI) and operate under the Banking Regulation Act, 1949.

A bank is a financial institution licensed to accept deposits from the public, provide loans and advances, and offer various financial services such as payment facilities, fund transfers, and investment options.

Key Features of Banks:

Accepting Deposits : It is primary function of a bank in which banks accept money from individuals and businesses in various forms like saving account , current account , fixed / term deposits .
Providing Loans and Advances : Banks lend money to customers in the form of Personal loans, Business loans, Home loans, Overdraft facilities . They earn profit mainly through interest on loan.
Credit Creation : Banks create credit by lending more money than the actual cash deposited (through the fractional reserve system). This expands the money supply in the economy.
Payment and Settlement Services : Banks facilitate Fund transfers, Cheques, Online payments, Debit/credit card transactions. They act as intermediaries in financial transactions.
Agency Functions : Banks act as agents for customers by Collecting cheques and bill , Paying utility bills, Managing investments, Paying dividends on behalf of companies.
Security : Banks provide Lockers facility for safe custody of money and valuables.
Liquidity : Banks along with managing reserves ensures liquidity and allow customers to withdraw money whenever they needed.
Regulation : Banks operate under strict regulation by central bank namely the Reserve Bank of India to maintain financial stability.
Extended Services : Modern banks also offer Insurance , Investment services, Foreign exchange, Wealth management.

NBFC

A Non-Banking Financial Company (NBFC) is a financial institution that provides banking-like services without holding a banking license. NBFCs play an important role in the Indian financial system by offering loans, asset financing, microfinance, and investment services, especially to individuals and small businesses who may not have easy access to traditional banks.

A Non-Banking Financial Company (NBFC) is a financial institution registered under the Companies Act 2013 and regulated by the Reserve Bank of India (RBI), but it does not hold a full banking license.

Registration and Licensing:

NBFCs are incorporated under the Companies Act. They must obtain a Certificate of Registration (CoR) from RBI to operate as an NBFC. As per current RBI regulations:

The minimum NOF requirement is ₹10 crore
Earlier, the requirement was ₹2 crore (revised upward)
Certain categories like NBFC-MFI or NBFC-Factor may have separate thresholds

Financial Activities:

NBFCs are primarily engaged in:

Loans and advances
Asset financing
Investment in shares, bonds, and securities
Leasing and hire purchase
Microfinance services

Cannot Accept Demand Deposits NBFCs cannot accept demand deposits (like savings or current accounts). Some NBFCs are allowed to accept fixed deposits, but under strict RBI regulations.

No Payment & Settlement Role NBFCs are not part of the payment and settlement system like banks and they cannot issue cheques drawn on themselves.

Regulated by RBI under the RBI Act, 1934. Must follow prudential norms related to capital adequacy, provisioning, and asset classification.

RBI Scale Based Regulation (SBR) framework:

Base Layer (NBFC-BL): Non-deposit taking NBFCs having Asset Size Below ₹1,000 crore
Middle Layer (NBFC-ML): Non-deposit taking NBFCs having Asset Size ₹1,000 crore and above or all deposit-taking NBFCs
Upper Layer (NBFC-UL): Large NBFCs which are identified by RBI
Top Layer (NBFC-TL): No fixed criteria required basically used only if RBI sees extreme systemic risk

Focus on Niche Segments:

Often serve sectors underserved by traditional banks, such as:

MSMEs
Rural borrowers
Small businesses
Vehicle financing

Types of NBFCs

Some common types include:

Investment and Credit Companies (ICC): ICC focus on loans, advances, and investment services
Housing Finance Companies (HFC): HFC focus on home loans and housing-related finance.
Infrastructure Finance Company (IFC): IFC focus on finance large infrastructure projects and 75% asset must be in infrastructure loan.
Microfinance Institution (MFI): MFI deals on small loans to low-income individuals or groups and focus on financial inclusion.

Operations

Generally have fewer regulatory restrictions compared to banks. Faster loan processing and flexible credit norms.

Differences Between NBFCs and Banks

Basis of Comparison	Bank	NBFC (Non-Banking Financial Company)
Definition	A financial institution licensed to accept deposits and provide banking services	A financial institution that provides banking-like services but does not hold a banking license
Governing Law	Banking Regulation Act, 1949	Companies Act, 2013
Regulatory Authority	Reserve Bank of India (RBI)	Reserve Bank of India (RBI)
Deposit Acceptance	Can accept demand deposits (savings & current accounts)	Cannot accept demand deposits
Payment & Settlement System	Banks are part of payment system (can issue cheques, UPI access, etc.)	NBFCs are not part of payment system; cannot issue cheques drawn on itself
Credit Creation	Banks can create credit	NBFCs cannot create credit in the same way as banks
CRR & SLR Requirement	Banks must maintain CRR & SLR with RBI	NBFCs are not required to maintain CRR & SLR
Foreign Investment	Restricted as per RBI guidelines	100% FDI allowed under automatic route (in many categories)
Deposit Insurance	Covered under deposit insurance by Deposit Insurance and Credit Guarantee Corporation (up to prescribed limit)	No deposit insurance facility
Primary Functions	Accept deposits, provide loans, remittance services	Provide loans, asset financing, investment, leasing, hire-purchase
Examples	State Bank of India, HDFC Bank	Bajaj Finance, Mahindra & Mahindra Financial Services