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Banks and Non-Banking Financial Companies (NBFCs) are the two main intermediaries providing financial services in India. NBFC is, generally, founded by private owner vs bank, which may be formed by the government or some governmental authority. And when the government-owned entities are added, they are known as NBFIs (Non-Banking Financial Intermediaries).
The privately-owned financial institutions, or NBFCs, are regulated by the RBI and other government entities. Both of them have their separate domain of expertise and are handling their respective fields quite well. Therefore, it is essential to know the specific area where they work. To understand which should be approached for financial help or deposits, under certain circumstances. It is essential to specify NBFC vs Bank, in the interest of depositors and investors.
Hence, let us study the difference between an NBFC and bank. NBFCs are regulated by the RBI under the RBI Act of 1935 from 1997 onward. They have to: register with the RBI, keep minimum capital, some of them have to maintain SLR and still some of them have to keep the CRAR (Capital to Risky Asset Ratio) etc. Other strict norms are also listed by the RBI. Important NBFCs are identified by the RBI by categorizing them into systemically important NBFCs, deposit taking NBFCs, NBFC- MFI etc.
The difference between commercial banks and NBFIs are sharply outlined. But these are more about the degree than about the kind.
What is an NBFC
An NBFC registration gets done under the Companies Act, 1956 or 2013, of an entity which is engaged in the business of loans and advances, acquisition of shares/bonds/debentures/stocks/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, chit fund business, insurance business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and purchase/sale/construction of immovable property.
Non-Banking Financial Companies are giving exceptional service in the economy by delivering numerous types of financial activities. NBFCs are a mixed group providing diversified services extending from microfinance to insurance. They provide MFI loans, infrastructure or asset financing, and much more.
What is a Bank
An NBFC registration gets done under the Companies Act, 1956 or 2013, of an entity which is engaged in the business of loans and advances, acquisition of shares/bonds/debentures/stocks/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, chit fund business, insurance business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and purchase/sale/construction of immovable property.
Non-Banking Financial Companies are giving exceptional service in the economy by delivering numerous types of financial activities. NBFCs are a mixed group providing diversified services extending from microfinance to insurance. They provide MFI loans, infrastructure or asset financing, and much more.
Bank vs NBFC
The differences are not only in the functioning of a bank and NBFC. The most significant ones are from the angle of the regulatory bodies and the extent of financial regulation by the RBI on both.
- Regulation
A bank is registered under the Banking Regulation Act, 1949. Whereas an NBFC is incorporated under the Indian Companies Act, either 1956 or 2013, and has to also be registered with RBI.
Banks are under strict regulations of the RBI as they deal with public deposits. The NBFCs also have to comply with RBI’s strict provisions but the extent of control is less than the banks.
Though in recent times, the regulatory norms are being converged, reducing the extent of this difference. Now, the regulations are converging, due to the fallouts of major NBFCs
- Deposit Acceptance & Interest
Banks are authorized to provide almost all financial services and products. They can accept demand deposits (deposits repayable on demand by customers have high liquidity and are considered as good as cash in hand). NBFCs are not entitled to accept demand deposits unless specific authorization is received by RBI.
The NBFCs can provide only certain financial functions applied to them. There are some NBFCs allowed to accept deposits (other types of deposits), but they are very stringently controlled by the RBI. The NBFCs are authorized to accept/renew public deposits for a minimum period of 12 months and a maximum of 60 months. There are less than 300 deposit-taking NBFCs out of over 12000 registered NBFCs in India. Regarding interest rate, the maximum interest an NBFC can offer is 12.5%. The interest may be paid or compounded at least monthly interval. Duration of less than a month is not allowed.
The repayment of deposits in NBFCs is not guaranteed by RBI, whereas the deposits in banks are.
- Home Loan Interest Rate
Banks function directly under the control of RBI, while NBFC registration is completed under the Companies’ Act. This basic difference has a straight implication in terms of the interest charged on loans that banks and NBFCs sanction. Banks are allowed to usually apply floating interest rates on your home loan, the rates for which are directly linked to MCLR (Marginal Cost of Funds based Lending Rate). The rates in this case increase or decrease with the changes in RBI policies. The policies are influenced by economic factors and vice-versa.
On the other hand, NBFCs set the interest rates on home loans as per Prime Lending Rate. This rate is not linked to the RBI. This can be negotiated by the borrower to get a higher amount sanctioned at a lower rate of interest as the lender has the power to decide the interest rate with far more flexibility.
However, this depends on the borrower fulfilling all the required eligibility conditions and having a good credit score.
So, make sure to check out all possible avenues that impact your loan interest rate before time.
- Fixed deposits of NBFC vs Bank
.Though both banks and NBFCs accept fixed deposits, however, there are some differences between them both. For example, while fixed deposits by NBFCs are generally rated by the rating agencies in the country. But fixed deposits of banks are not rated by any rating agencies. Another point of difference between their fixed deposits is insurance. Fixed deposits of banks are insured, while those with NBFCs are not.
In fact, for default by a bank, the Deposit Insurance and Credit Guarantee Corporation of India pays the insured amount on a bank deposit, not exceeding Rs. 1 lakh. But in case an NBFC defaults on its payments, you would lose the principal, as well as the interest amount. This is why experts advise opting for highly rated safe fixed deposits only.
Also, another thing worth noting is that deposits with an NBFC earn a higher rate of interest as compared to deposits with a bank.
- Flexibility
In certain areas, NBFCs have an edge over the banks in terms of the convenience and flexibility they offer on the loan and advances. You are not hassled with lengthy paperwork when you apply for a deposit or loan with NBFC vs a bank. Also, FinTech NBFCs allow you to take a loan by applying for it online, comfortably from your home or office. Through this online facility is available with banks also. Apart from flexibility for applying, a loan of up to Rs.10 crore for a tenor of 25 years can be availed of too. With most leading NBFCs, you can get your loan approved within 48 hours of your loan application.
- Eligibility Criteria
Your repayment capacity, income, credit rating, the place of residence and work, etc. are the basic factors on which the approval of your loan application is based. These are the deciding parameters for both banks and NBFCs. However, each financial institution has its own loan eligibility criteria. These conditions are rather simple in the case of most NBFCs. And you can apply with ease. The same may not be true for banks. For example, you may not qualify for any loan with banks due to a low credit score. But some NBFCs may disburse a loan to you, charging a higher interest rate.
- Processing Time
Both banks and NBFCs are very thorough with their steps of processing, sanctioning and disbursing loans. This also involves carrying out stringent verifications. However, the processing time taken by an NBFC is usually lower vs the bank. Along with online application facilities where you are to upload images of all the required documents. Generally, the loan gets approved within 48 hours of your application to an NBFC. Ensuring quicker availability of crucial funds.
- Better Customer Services
The entire financial sector is an industry in the services sector. The wheels of both banks and NBFCs keep moving day and night to meet the financial requirement of the public. But when it comes to dedicated customer service banks get outpaced by NBFCs most of the time. On their portal, you are allowed to keep a tab of all your loan details, charges, and payments to your online account. Additionally, you are assigned a CRM (customer relationship manager) attending to all your queries or any complication you are facing related to your loan and to help you manage your loan comfortably.
Banks are not permitted to offer asset restructuring for individuals and companies, whereas, NBFCs are permitted to offer this service.
- Star Rating
Rating is another key factor between NBFC vs bank. For example, the deposits of NBFCs have a star rating, while bank deposits do not need any such ranking. Because bank deposits are considered very safe, while NBFC deposits are not. Hence, it is a good idea to check the ratings of NBFC you want to invest in. The ones with good quality deposits are AAA-rated, implying the safety and timely payment of interest and principal amount. Hence, do check the same before investing.
- Target Market
As far as banks are concerned, they tend to target corporates as well as retailers. On the other hand, NBFCs are more equipped for handling the retail sector, as well as the unorganized sector of businesses. For example, distant areas, such as rural or semi-urban regions of the country may not have branches of any bank. But there may be some person or more, acting as representatives of NBFCs.
Another difference is in the credit card issuance. Banks tend to frequently issue credit cards of varied types depending on the customers, while NBFCs do not. NBFC is not authorized to issue ATM cards vs bank, which can issue ATM cards
- Foreign Investment
Foreign Investments up to 100% is allowed in NBFC, after taking authorization from RBI. On the other hand, only certain banks of the private sector are entitled for foreign investment. Further, in the case of banks, the maximum foreign investment would be 74%, not more.
- Reserve Ratio
It is mandatory for banks to maintain minimum reserve ratios such as CRR (cash reserve ratio) or SLR (statutory liquidity ratio). As opposed to NBFCs, which do not require to maintain any such ratios.
Conclusion of NBFC vs Bank
NBFC license is mainly provided for the purpose of financing the poor section of the society and for their economic development. Whereas the banks are established by the government to receive deposits and grant credit to the public. The regulations licensing a bank are more stringent than that of an NBFC. Moreover, a bank cannot operate any other business activity than banking, but an NBFC can operate such business.
NBFCs, though incorporated with the Companies Act, are under strict regulations by the RBI. Therefore, rest assured, your deposits, with a high-rated firm, are safer than before.
This is an information blog by NBFC License India. The topmost company providing all services related to NBFC License, NBFC takeover or NBFC for sale. Take us along your journey of creating NBFC, so that you can take care of the business side, and we look after the legal requirements and compliances, etc.
For any query, or you want to know more about NBFCs, call us at (+91) 8750008585.
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Frequently Asked Questions
Q. What is an NBFC?
NBFC is a company incorporated under the Companies Act, 1956 or 2013 that is involved in providing loans and advances, acquisition of stocks/shares/securities/bonds/debentures issued by the government or any local authority or any other market securities of a like nature, hire-purchase, leasing, insurance business, chit fund business, as its primary activity.
The principal business of the NBFCs is to raise capital funds from public depositors & investors and then lend to borrowers.
Q. How to register NBFC?
- Registration of an NBFC involves basically 4-steps, in simple terms. These are:
- The applicant company is required to apply online for NBFC License to the RBI. On submission of application form and the relevant documents, a CARN number gets generated automatically. This is to be used as reference number during all future conversations and inquiries.
- After that, the company is to submit the hard copies of the online application and the supporting documents as uploaded, to the zonal office of the RBI.
- After checking the documents, the regional office sends the application to the head office of the RBI. There, a more meticulous examination is conducted.
- If all legal stipulations are being met, the company will get the NBFC License. And CoR (certificate of registration) will be issued.
Q. What documents are to be given with NBFC license application?
Following documents are to be attached with the application form for NBFC registration:
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- Bank Account with a minimum paid-up equity share capital of Rs. 2 crore
- Company Incorporation Certificate
- MoA & AoA
- Address proof of the company
- Duly filled up and signed Annexure I, II, and III
- Details of the Directors
- Documents regarding administration and management of the company
- Audited financial accounts for at least last 3-years
- Board resolution accepting the company’s registration as an NBFC
- A brief overview of the company’s works and activities in the past 3 years
- Income tax, PAN, etc.
- Any other relevant documents.
Q. Does RBI control all NBFCs?
No, RBI does not regulate all financial institutions. Housing Finance Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Merchant Banking Companies, Insurance companies, Nidhi Companies, and Chit Fund Companies are NBFCs but they are exempt from registration u/s 45-IA of the RBI Act, 1949.
Q. What is required for NBFC registration?
An entity wishing to start business of non-banking financial institution as defined under Section 45 I (a) of the RBI Act, 1949 should:
1) be a company registered under any of the Companies Act, 1956 or 2013.
2) have a minimum net owned fund (NOF) of Rs. 200 lakh. (The minimum NOF required for specialized NBFCs such as NBFC-MFIs, NBFC-Factors, CICs is different)