The Differences between NFBC and Banks

by CorpSeed Pvt Ltd Environment | Compliance | Finance

With the dramatic increase in globalization, companies are becoming more complex. To take these complexities into account, financial institutions have begun to provide a range of financial products and services. These financial institutions are incredibly important; they have been the lifeblood of businesses all over the world, especially during market fluctuations. Not only do they contribute to economic prosperity during times of economic recovery, but they also become a crucial source of financing when the economy is not doing well.

However, with the increase in the number of financial institutions, competition between them is increasing, which has led to an offer of both bank and non-bank products at competitive prices. This creates a difficult choice for all investors and borrowers looking for financial opportunities.

Before choosing any product, it is best to compare it with other products on the market by observing the features it offers. In addition, reviews of these products help assess product reliability. The reputation of an institution also counts. Reputable institutions often charge a relatively higher price for their product. Therefore, a potential customer must evaluate not only if he or she wants a financial or non-financial institution, but also the reputation of the institution and the services it provides.

Banks have been one of the most common financial institutions in the world. But there are also non-bank financial companies (NBFC) that carry out lending and other financial activities. Although there are similarities between the NBFC and the banks, they also differ in many respects.

NBFCs

An NBFC, also called a non-banking finance company, is a registered entity pursuant to the Companies Act of 1956. The Indian government established these institutions because it felt strongly about offering banking services to underdeveloped subjects that were difficult to access banks. The Reserve Bank of India (RBI) may register a company as an NBFC if it meets two criteria: (1) its financial assets make up more than 50% of the total assets and (2) the revenues from these assets make up more than 50 percent of gross income.

An NBFC is not a bank, but provides bank-like lending services, such as the provision of advances, savings and investment products, and management of equity portfolios, credit lines, money market exchanges, money transfers, etc. Moreover, the NBFC are also involved in activities such as housing finance, installment purchase, risk capital, leasing and infrastructure financing. These institutions only accept time deposits and do not have deposits repayable on request. ICICI and SBI Factors are two examples of non-banking financial companies.

The institutions of the NBFC fall into several categories: (1) an investment the company with its main activities the acquisition of securities, (2) a loan company, (3) a financial asset of excluded assets, (4) a company financial infrastructure with at least 75% of its assets in infrastructure loans, (5) an important basic investment company systematically and (6) an infrastructure debt fund.

To ensure that these institutions function properly, the RBI has issued rules and regulations for the acceptance of deposits, such as a mandatory credit assessment, mandatory liquid asset management for reimbursement to depositors, exposure limitation, account books, an adequate capital maintenance and inspection of the NBFC.

Bank

Banks, on the other hand, are financial institutions under the authority of a government. They carry out banking activities, such as the granting of loans, the acceptance of deposits, the management of withdrawals, the provision of utility services and the compensation of controls. Banks are the top institutions in any given economy; they control the financial system of a country. Their role as financial intermediaries, between depositors and borrowers, allows an economy to function smoothly.

There are different types of banks; for example, there are public sector banks, foreign banks and private sector banks. Their responsibilities include the creation of credit products, loan loans, the management of deposits, the guarantee of money transfers and the provision of public services. However, banks are generally classified as central banks and commercial banks. Each country has only one central bank, but there is no limit to the number of commercial banks.

The shareholders are the actual owners of the banking institutions and the banks operate with the intention of making profits in order to increase the wealth of the shareholders.

Differences between NFBC and banks

There are many differences between banks and NBFC.

Authorization

The first and fundamental difference between them is their level of authorization. The NBFC are not obliged to hold a banking license to provide banking services to the public. On the contrary, banks are authorized by governments and their ultimate goal is to serve the general public.

Incorporation

As already discussed, the NBFCs were established under the Companies Act of 1956. Instead, the banks were registered under the banking regulation law of 1949. Therefore, the institutions follow different rules and regulations for the provision of services.

Deposit request

Deposit on demand or DD is a fund from which a person can withdraw a deposit at any time from the financial institution. NBFC does not accept DD for any financial transaction. However, these accounts are widely used in banks to make payments.

Maintenance of the reserve relationship

The reserve ratio is a part of the balance of the depositor that must be kept by a bank in cash as established by the central bank in most countries. There is no obligation for the NBFC to maintain a reserve ratio to operate in the economy, but it is mandatory for banks to do so because it affects the money supply in a country in a given period of time.

Foreign investment

The NBFC are authorized to make a financial investment of up to 100 percent, which is substantially higher than the percentage granted to the banks, ie 74 percent.

Payment system and settlements

The NBFC are not part of the payment and settlement system, while the banks are considered the core of this system.

Insurance deposit

The structure of the deposit insurance offered by the Deposit Insurance and the Credit Guarantee Company is not available for the NBFC, but the banks can certainly use this structure to safeguard their clients' money.

Other functions

There are numerous other differences between the functions provided by both types of institutions. For example, unlike banks, NBFCs are not allowed to collect deposits or issue checks. Furthermore, the NBFC cannot be involved in industrial or agricultural activities, nor can they participate in the construction of properties. In addition, banks can issue draft requests, but NBFC cannot.

It is very important to learn the differences between these institutions because the right institution can help you make better decisions based on your financial goals. With rapidly changing market trends, every penny counts, so choosing an institution is one of the key decisions to make. This will not only allow you to plan effectively, but it will also allow you to make changes to your plan if a change occurs that is not in your control.