In India, there are many types of financial institutions that provide financial and economic support to organisations. The running of these financial institutions affects the way people and government use money. The major financial institutions in India are NBFCs and banks. There are distinct differences between NBFCs and banks running in India.
A bank is a financial institution that takes money from its customers as deposits and then uses the deposited money to loan funds to other parties so that there is a cash flow and interest income. A NBFC is a non-banking financial company, so its operational model is very different from what a bank works as. In this article, we will talk about the difference between NBFC and banks to know how they function in society.
What is the difference between banks and NBFC organisations?
There are many points of difference between banks and NBFC organisations. For example, the most basic difference between a bank and NBFC is that a bank holds a government-issued banking licence, which allows the bank to act as an intermediary financial channel for lending and borrowing. An NBFC is a different one because it does not have a banking licence, and even though it offers banking-like services, it is not a bank in structure or functions.
The banks were incorporated into government financial institutions according to the Banking Regulations Act of 1949. On the other hand, NBFCs have been incorporated according to the Companies Act 1956.
Banks are operated according to government regulations after getting a licence of operation related to the sector. On the other hand, the NBFC organisations do not need a licence to operate, although they do follow some separate regulations.
Banks have some authority about what they can issue and cannot. For example, a registered bank can issue a demand draft. A NBFC cannot issue or remit a demand draft on behalf of a person. A bank provides transaction services so you can do transactions from your bank account to another bank account. However, NBFCs cannot provide transaction services to the people who are registered under them. Similarly, because banks work with deposits, they can also accept demand deposits from people. However, a NBFC cannot accept demand deposits from its clients.
When compared with each other, a bank can create and provide Credit, but an NBFC organisation cannot create or provide Credit to people. Banks are, therefore, part of the payment and settlement system of finances, as the NBFC organisation is not a part of the same system. Banks can also make cheques payable to themselves, whereas NBFCs cannot make cheques payable to themselves.
Is the bank or NBFC better?
Now that these basic differences are clear, here is a discussion on how NBFC and banks have different functions. For example, banks are the financial organisations that are responsible for overseeing the whole nation’s financial sector. The banks maintain the credit and demand market to run the financial sector. Businesses and people take loans to create revenue and buy assets. The surplus money is deposited as deposits in banks. Banks are, therefore, a major part of the BFSI sector. Banks are, therefore, the major channels between borrowers and lenders of money.
Banks establish Credit, raise money for businesses so they can loan it out, and transfer money from one account to another as per the requirements that arise within the system. Banks are the main scaffold of the country’s economic distribution system and are more important than NBFCs.
On the other hand, there are NBFCs that are not the same as banks, but they engage in indirect financing as well as numerous other banking-related activities. Although they engage in these activities, the real authority lies with the banks of India, with which the NBFCs create tie-ups. An NBFC is also relevant to businesses because the organisation offers business corporation services and facilities such as the purchase of stocks, equities, bonds, securities, and other government-issued securities so that business owners can invest their profits and increase their capital.
There are a number of other services like rent-to-own, renting, and startup capital financing services so that people can start their own entrepreneurship and invest in real estate. Some of the NBFCs also offer insurance services and are included in the BFSI sector. NBFCs are of many types, and they cater to different sections of the Indian population. There are many objectives that NBFCs work with.
For example, NBFCs promote financial inclusion because they are open to low-income households and people. The NBFCs also play a huge role in supporting SMEs by providing them with startup capital services and funds. Most of the low-income groups approach NBFCs because getting loans from such financial companies is easier and faster. These NBFCs also play a crucial role in powering the economy because they help in improving customer spending.
There are a number of services offered by NBFCs that people avail. For example, NBFCs can help in getting personal loans, home loans, or vehicle loans so people can increase their personal assets and value. Sometimes, when people do not have collateral, NBFCs also provide gold loans against gold jewellery and objects. These types of loans are very popular among the lower-income population of India.
There are some micro financing services that NBFCs also offer. Many sectors of the Indian economy, like agriculture, SMEs, and infrastructure, are depending more and more on NBFCs. NBFCs are preferred by many people because there is less documentation involved when compared with banks. However, when choosing a NBFC for its services, a customer needs to look at its reputation and service offerings. Compare the benefits of bank vs NBFC to get a clearer picture of where you should invest.
As a fintech company, FidyPay has offered its banking and financing solutions to banks as well as NBFCs. When choosing a NBFC or a bank, always look at the technical support and accessibility they provide you. If you are aiming at technically transforming your financial company, contact the team of FidyPay today. We will help you identify the scope of improvement in the operations of your company.