Native Payment Channels in India - Key Differences between NBFCs and Banks in India

　　Key Differences and Advantages of Non-Banking Financial Companies NBFCs in India over Banks

　　I. Definition of NBFC and Bank

　　1.1 NBFC

　　Non-Banking Financial Companies (NBFCs) are financial institutions that provide bank-like services but do not hold a banking licence. They are registered under the Companies Act, 1956 and are regulated by the Reserve Bank of India (RBI).NBFCs can engage in activities such as lending, leasing, instalments, investments and other financial services.

　　1.2 Functions of NBFCs in India

　　The main functions of Non-Banking Finance Companies (NBFCs) include lending and credit, asset finance, investment and advisory services, leasing and hire purchase, microfinance, factoring and invoice discounting, foreign exchange services, etc.

　　1.3 Banks

　　Banks are financial institutions that provide a wide range of financial services to individuals, corporates and governments. They accept deposits from and make loans to the public and are regulated by the Reserve Bank of India (RBI).

　　1.4 Functions of the Bank of India

　　The main functions of the Bank of India include acceptance of deposits, loans and credits, payment services, custody of valuables, foreign exchange services, investment and wealth management, trade finance and letters of credit, financial intermediation, treasury operations, etc.

　　II. Key differences between NBFC and banks

　　Here are the main differences between NBFC and banks:

　　- Definition : NBFC is a company registered under the Companies Act, 1956 to engage in financial activities without a banking licence. A bank is a financial institution authorised by the Government of India to accept deposits from the public and lend money.

　　- Regulation: NBFC is primarily regulated by the Reserve Bank of India under the Reserve Bank of India Act, 1934. Banks are primarily regulated by the Reserve Bank of India under the Banking Regulation Act, 1949.

　　- Acceptance of deposits: NBFC can accept time deposits under certain conditions, but not demand deposits. Banks can accept both demand and time deposits.

　　- Payment and settlement systems: NBFCs are not usually part of payment and settlement systems, whereas banks are part of payment and settlement systems.

　　- Credit creation: NBFC has limited credit capacity compared to banks. Banks can create credit through lending activities.

　　- Capital Adequacy: NBFC's capital adequacy requirements vary depending on the category of NBFC. Banks are subject to the stringent capital adequacy requirements of the Basel standards.

　　- Liquidity: NBFC has less stringent liquidity requirements than banks. Banks maintain higher liquidity ratios when dealing with demand deposits.

　　- Risk Management: NBFC's risk management practices vary from activity to activity. Banks need sound risk management frameworks due to the variety of risks to which they are exposed.

　　- Ownership structure: NBFCs can be publicly, privately or foreign owned, but ownership restrictions are less stringent. Banks can be publicly, privately or foreign owned, but have specific ownership restrictions.

　　- Taxes: Both NBFC and the Bank are subject to income tax, corporation tax and other applicable taxes.

　　- Services Provided: NBFC is primarily engaged in lending and borrowing activities, but may provide other financial services such as investment and insurance on a limited basis. The bank offers a wide range of services, including deposits, loans, credit cards, debit cards, internet banking and other financial services.

　　III. Conclusion

　　In summary, while both banks and NBFCs provide financial services, they operate differently. NBFCs generally specialise in lending operations for corporates, whereas banks usually accept and disburse loans. In recent years, the financial needs of individual consumers in India have also been met by NBFCs. Moreover, banks are mostly engaged in stock trading while providing financial guidance to their customers. NBFCs, on the other hand, offer a wide range of financial services, including securities, insurance and investments. Numerous laws and regulations enacted by the Government of India also control banks to a large extent.NBFCs follow the guidelines set by the Reserve Bank of India.