The banks and NBFCs are the two dominant types of financial intermediaries in any financial system. Banks are the traditional types of entities who accepts deposits from the public and provides loans to the public. In addition to deposit mobilisation and loan supply, banks now performs several other functions like merchant banking and other financial services.
On the other hand, the Non-Banking Financial Intermediaries (NBFIs) and its major variant – the Non-Banking Financial Companies (NBFCs) are offering much more divergent and large variety of financial services to different types of consumers without a banking license. If banks are regulated by the RBI as per the Banking Regulation Act, the NBFCs are regulated (by the RBI) as per the separate provisions of the RBI Act.
Difference between banks and the NBFCs are diverse – they differ in terms of the types of services they provide, mode of registration or incorporation, regulatory guidelines etc.
But the most important difference is that banks can do the traditional banking functions pointed out in the Banking Regulation Act -especially, they can receive demand deposits. Demand deposits means banks can receive short term deposits from the public and can issue checks on the basis of this deposit. Such an activity will lead to credit creation or credit multiplication. On the other hand, the NBFCs can’t do this as they are not permitted to receive demand deposits. Even a small number of NBFCs that can receive deposits (NBFC-D) can not receive demand deposits.
Difference Between Banks and NBFIs
There are some crucial differences, as well as similarities, regarding the functioning and regulation of banks and NBFCs. Notably, the NBFCs give loans and make investments, and hence their activities are similar to that of banks. An important difference is that NBFCs cannot accept demand deposits. Following are the main differences between the two:
- NBFCs cannot accept demand deposits.
- NBFCs do not come under the payment and settlement system and they cannot issue cheques drawn on themselves.
iii. Deposit insurance facility is not available for NBFC depositors.
- Banks are regulated and supervised by the RBI under the Banking Regulation Act whereas NBFCs are regulated under the relevant clauses of RBI Act.
Even though both are competitors, there is strong interconnectedness between NBFIs and Commercial Banks. Commercial banks are providing funds to NBFCs in recent years, especially to NBFC–MFIs. There is on-lending by banks to the various deserving sectors through NBFCs.
The first difference is regarding deposit acceptance. Here, the number of NBFCs who can accept deposit is limited. There are only 54 (as on January 2022) deposit-accepting NBFCs (NBFC-D) out of nearly ten thousand NBFCs registered with the RBI. Even though some NBFCs can accept deposit from the public as the banks do, they cannot accept demand deposits. Or in other words, the deposit-taking activities of NBFCs are limited. The RBI also would like to reduce the number of NBFC-D for the sake of protecting the interest of depositors. Regulations are also tough for NBFC-D compared to other types of NBFCs.
The significance of demand deposit is that it has high liquidity and is part of narrow money. Through demand deposits, banks can multiply money (credit), whereas that power is not there for the NBFCs. Regarding the NBFC-D, they are allowed to accept/renew public deposits for a minimum period of 12 months and a maximum period of 60 months. Similarly, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. There is no deposit guarantee for the deposits with the NBFCs.
From the angle of financial regulation, banks are strictly regulated by the RBI as they deal with public deposits and are regulated under the Banking Regulation Act. On the other hand, NBFCs are regulated as per the RBI Act with periodic amendments. Regulations are deep and complex in the case of banks compared to NBFCs. The norm here is that an institution that accepts deposits of the public will be highly regulated. The safety of the publics’ money is the most important concern for the RBI.
At the same time, there is a trend of regulatory convergence between banks and NBFCs. Some of the regulatory norms that are applicable to banks are also now extended to NBFCs. Still, tougher regulations are there only for NBFC-D and Systemically important NBFCs. Following are the main regulatory differences between banks and NBFCs:
|Regulation as per:||Banking Regulation Act||RBI Act|
|Regulated by:||RBI||RBI for most cases|
|Registration||As banks under the BR Act.||As companies under the companies Act|
|Demand Deposits||Can accept all types of deposits||Cannot accept demand deposits|
|Deposit insurance||Covered under deposit insurance.||No deposit insurance|
|Payment and Settlement system of the RBI||Banks avail it (RTGS, NEFT etc.)||Cannot avail.|
|CRAR||Applicable||15% CRAR for deposit-taking NBFCs, HFCs|
|SLR||Applicable||15% SLR for deposit-taking NBFCs|
|Prompt Corrective Action Plan||Applicable||Applicable|
|IBC||Not applicable||Applicable (in the case of selected NBFCs)|
|Incorporation||Banking Regulation Act||Companies Act|
|Foreign investment||Allowed up to 74% (in private sector banks)||Up to 100%|
|*Advanced regulatory requirements, like CRAR, SLR, Prudential norms etc., applicable only to NBFC-D and NBFC-ND-SI in a differential manner. Bulk of these regulations are not applicable to NBFC-ND (Non-systemic), who dominate the sector.|
Now, the number of NBFCs are growing. Their role is getting tremendous importance. Even the failure of some NBFCs like IL&FS and DHFL have shocked the financial system. In this context, the RBI is extending the tough regulation that are deployed on banks to NBFCs. In this context, the latest development is that the RBI has applied Prompt Corrective Action (PCA) Plan to NBFCs as well. Till now, the PCA was applicable to banks only.