Difference between NBFC and Bank

A bank is a government authorized financial institution that does banking services. It allows the public to save, multiply, and manage their money. Banks, according to the public, are considered to be the safe place to keep their funds. In addition, banks also offer loans that can be repaid during the tenure period. 

Banks play a vital role in a country’s economic and financial development. A non-banking financial institution (NBFI) or Non Bank Financial Company (NBFC) is also a financial institution that does not have a full banking license. 

It is not maintained by a national or international banking regulatory agency. NBFC also provides bank-related financial services, such as investments, savings, offering loans, etc.

In this blog, let’s analyze the key functions of banks and NBFC. In addition, let’s briefly check out their different roles and advantages. 

What are NBFCs?

 NBFCs are a type of financial institution that facilitates banking services to the public without having a banking license. Though these NBFCs don’t have bank authorization, they provide financial services to the public. 

They are capable of offering a wide range of bank services similar to an authorized full-fledged bank. NBFCs will not accept demand deposits also, they cannot provide checking and savings accounts like the traditional banks. 

NBFCs are involved in lending actions like providing loans such as personal, vehicle, housing, business, etc, and credit facilities to individuals and businesses.  

Functions of NBFC

Non Banking Financial Companies (NBFCs) embrace economic growth and fulfill the various financial needs of individuals and business entities. They aim to provide financial services for any enterprise with unique business ideas and requirements.

NBFCs primarily accept deposits, provide loans, and act as negotiators in directing limited financial funds into capital formation. NBFC performs a wide range of functions, which include –

Lending and Credit: NBFCs offer flexible lending options for various purposes like personal loans, vehicle loans, housing loans, etc to individuals and businesses. 

Asset Financing: NBFCs engage in asset financing companies which include fund managers who are responsible for investing funds pooled from small investors. It also involves providing funds for the purchase or leasing of assets such as machinery, equipment, vehicles, or real estate. 

Investment and Advisory Services: Many NBFCs provide investment consultancy, portfolio management, and risk assessment services. It also facilitates financing in securities, mutual funds, and other investment instruments.

Leasing and Hire-Purchase: NBFCs involve leasing and hire-purchase activities, allowing individuals and businesses to get the assets without full upfront payment. Leasing contracts and Hire-purchase typically have fixed durations. It enables any business activity to access assets for a specified period.

Microfinance: Some NBFCs allow microenterprises through microfinance. They enhance low-income individuals, self-help groups, and small enterprises by providing small loans and financial services. 

Factoring and Invoice Discounting: NBFCs facilitate factoring and invoice discounting services. They provide immediate liquidity to the businesses, enabling them to meet working capital needs.

Foreign Exchange Services: NBFCs also provide foreign exchange services, facilitating currency exchange and remittance transactions.

What are Banks?

Banks are financial institutions that offer equal trustworthiness to both types of people like one who wishes to save and the other who borrows. They smoothly ensure to favor the public, make them financially stable, and balance the economic functions. 

The primary role of the bank is to take in money from the public with excess funds and who wish to save, which is termed as ‘deposits.’ Also, it lends funds to those who need it. 

Banks act as an intermediary between depositors, the one who lends money to banks, and borrowers, the one who borrows money from banks. The amount banks pay to the depositors and the income they earn on their loans are termed as ‘interest’.

Banks offer multiple financial services to individuals, businesses, and governments. In India, banks are governed by the Reserve Bank of India (RBI), which is considered to be the country’s central bank.  

Functions of Banks

Though we are clear with the primary purpose of the banks, it is more important to know about the various functions the bank does. Following are the wide range of functions played by banks:

Accepting Deposits: Banks provide a safe place and accept deposits from individuals and businesses who own excess funds. Depositors can safely place their money in banks which can yield them interest on deposits, and make use of banking services.

Lending and Credit: Banks can offer loans and credit facilities to individuals and businesses to meet their capital requirements, such as personal loans, home loans, auto loans, working capital loans, business expansion, and project financing.

Payment Services: Banks promote payment transactions. Payment services include allowing customers to make payments, transfer funds, and conduct financial transactions easily and securely.

Safekeeping of Valuables: Banks offer safe deposit lockers for customers where they can securely store valuable items and documents, jewelry, and other assets.  

Foreign Exchange Services: Banks facilitate foreign currency exchange services through which customers can buy, sell, or even exchange foreign currencies. It also includes wire transfers (an electronic funds transfer).

Investment and Wealth Management: Banks provide investment products like mutual funds, fixed deposits, stocks, and government bonds, helping clients manage their investments and grow their wealth. Banks offer investment products like mutual funds, fixed deposits, and government bonds and assist clients in managing their investment portfolios.  

Trade Finance and Letters of Credit: As a trade finance tool, Banks issue letters of credit, guarantees, and financing options to protect both importers and exporters in their trade transactions.

Financial Intermediation: Banks move funds from individuals and business parties with excess capital to parties needing funds. It’s a process of channeling from deposits to lending and investment activities. activities. 

Treasury Operations: Some Banks provide treasury services like foreign exchange trading, money market operations, investment in government securities, and managing the bank’s financial assets and liabilities.

Difference Between NBFC and Bank

The difference between a Bank and NBFC is, that the Bank is a government-authorized financial intermediary, whereas NBFC runs without having a bank license. Both provide banking and financial services to the public.

Banks accept demand deposits whereas, NBFCs do not accept demand deposits from the public. Banks issue and accept cheques but NBFC cannot issue and accept cheques. Banks have the power to create credit through fractional reserve banking but NBFC do not have so. In banks, government insurance schemes may guarantee deposits whereas in NBFC there is no government guarantee on deposits.

Bottomline

Hope, now you are clear with Banks and NBFC. Thus, both have their advantages to benefit the public in terms of financial and economic activity. The wide range of their functions can ensure you can deposit or invest sustainably.

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