Both banks and NBFCs are intermediaries that provide similar services to customers. But unlike banks, NBFCs cannot issue self-drawn checks and demand drafts.
Another point of difference between the two is that banks participate in the country's payment mechanism, but NBFCs are not involved in such activities.
As finance is a basic need for both individuals or businesses, and banks alone cannot cater to all the needs of customers, NBFCs came into the market as complement banks to provide financial services to both public and private sectors.
But people often have some confusion about non-banking financial companies (NBFCs) and their facilities. This is why they find it difficult to decide where to go for financial services because they are extremely different from each other.
In this article, we have discussed the major differences between these two financial institutions.
What is an NBFC?
Non-Banking Financial Company (NBFC) is also known as a Non-Banking Financial Institution(NBFI) that is incorporated under the Companies Act, 2013. It is regulated by the Reserve Bank of India (RBI) under the RBI Act, 1934.
NBFCs offer various types of banking services without a banking license.
Investment banks such as mortgage banks, insurance companies, hedge funds, private equity funds, and public-to-public lenders are examples of NBFCs.
What is an Investment Bank?
Investment banks are authorized by government bodies (i.e., RBI) to carry out various banking service activities, such as transactions, cash deposits, credit granting, loan facilities, and other general utility services.
Investment banks are licensed and incorporated under the Banking Regulation Act, 1949.
The investment bank acts as an intermediary between depositors and borrowers to balance the flow of money.
Although both investment banks and NBFCs act as an intermediary, providing similar services to their customers, there are some differences in their services that are discussed below.
Differences between Investment banks and NBFCs
1. NBFCs are unauthorized banks that provide financial services to their customers without a license, whereas investment banks are government-authorized banks that provide banking services to the general public.
2. Non-banking financial institutions are incorporated under the Companies Act, 2013, while investment banks are incorporated under the Banking Regulation Act, 1949.
3. NBFCs allow customers up to 100% for foreign investment, whereas investment banks allow only up to 74% for foreign investment.
4. Non-banking financial institutions do not have transaction services. In contrast, investment banks are well organized for their transaction services, such as cash deposits, money transfers, overdraft services, and check facilities, etc.
5. NBFCs do not provide credit service to their customers, whereas all investment banks create credit.
6. All investment banks are directly or indirectly involved in the payment and settlement cycle, while NBFCs have no role.
7. Investment banks must maintain reserve ratios such as SLR(Statutory Liquidity Ratio) or CRR(Cash Reserve Ratio), but NBFC bank is not required to maintain any such ratio.
8. In an investment bank, the public deposits insurance with the help of DICGC (Deposit Insurance and Credit Guarantee Corporation), whereas such facilities are not available in NBFC.
9. All the Investment banks have the facility to accept demand deposits; on the other hand, NBFCs do not have such facilities of the deposit that are repayable on demand.
10. On the other hand, banks do not have the right to operate any other business except banking. In contrast, a non-banking financial institution has the right to operate other businesses than banking. This is one of the major benefits of NBFCs.
In short, NBFCs are not liable to follow all banking guidelines, whereas investment banks must follow all banking guidelines.
Conclusion
NBFCs are primarily set up to provide financial services to the lower reaches of societies. On the other hand, banks have been prominently incorporated by the government to accept deposits and give credit to large scale customers.
