NBFC vs Bank : A Critical Study by CorpZo

Introduction to NBFC

The Non-Banking Financial Company (NBFC) is incorporated and regulated under the Companies Act 2013 which provides various facilities similar to the traditional banking system such as granting loans, acquisition of shares & debentures issued by the government, chit funds business. The NBFC does not include Saving Account and Current Account such accounts can be accessed through the traditional banking system as per the RBI guidelines. Further, NBFC is a non-licensed banking company which means that the RBI does not recognize the NBFC, thus the said companies have to collaborate with licensed banks for conducting financial operations.

Features of NBFC

1. The NBFC are non-licensed banking system
2. Not regulated by the guidelines provided by the RBI which has to be mandatorily followed however there are some implicit guidelines which are to be followed by the said company
3. NBFC are regulated by the Ministry of Corporate Affairs & RBI

Types of NBFC

1. Assets Finance Company - The said companies are involved in the activities of granting loans and advances for procurement of physical assets such as automobiles, moving & material handling equipment, Generators sets etc.
2. Investment Companies - The said company involves transactions related to acquisition or selling of the shares, debentures & securities.
3. Loan Company - The Company involved in the business of granting loans for wholesale & retail traders, small scale industries & entrepreneurs. However, such companies grant loans at higher interest rates as compared to interest rates of traditional banking.
4. Infrastructure Finance Company - The Company can be deemed as financial company if it includes funds of at least Rs 300 Crores and expanded 75% of the total assets
5. Infrastructure Debt Fund - Debt Funds refers to investment pools in which main holdings are fixed income investment. The significance of these funds is to fund the commercial infrastructure. In India, IDF can operate as trust or funds, if it operates as Trust it is considered as a mutual fund and regulated by SEBI, if it operates as a company, it will be considered as NBFC regulated by the RBI.
6. Gold Loans NBFC - The said company involved in the business granting loans for procuring gold, the increased demands of gold loan has resulted into such NBFC. The main NBFC for providing gold loans are Kerala based such as Muthoot Finance, Malappuram Finance, Muthoot Fincorp.

Introduction to Banking Institution

The Banking system are financial institutions which are governed by the Reserve Bank of India (RBI), the banking includes various activities like accepting deposits, granting loans & advances, acting as an intermediary between the depositors & borrowers.

Functions of Banking Institutions

1. Acceptance of deposit by the public
2. Providing Withdrawal & Demand Facilities
3. Granting Loans
4. Transfer of Funds
5. Issuance of Drafts
6. Providing Customer with Locker Facilities
7. Dealing in Foreign Exchange

Types of Banking Institutions

1. Central Bank - This Bank is considered as a supervisory bank, In India RBI is the Central Bank. The functions of such banks include-

• Guiding other Banks in the Country
• Issuing the Currencies
• Implementation of Monetary Policies
• Supervisor of Financial system

2. Cooperative Bank - These banks are incorporated under the State government Acts; the main emphasis is upon providing the concessional loans to the entities involved in the agriculture & other allied industries. The said banks are 3 tier structure -

Tier 1 (State Level) - State Cooperative Banks regulated by RBI, State Govt, NABARD

Tier 2 (District Level) - Central/District Cooperative Banks

Tier 3 (Village Level) - Primary Agriculture Cooperative Banks

3. Commercial Banks - Incorporated under Banking Companies Act 1956, the functions of Cooperative Banks are-

• It operates acts on a commercial basis and focuses upon profit making
• It has unified structure and owned by the government or private entities
• These types banks does not provide concessional interest unless prescribed by RBI
• Includes both rural & urban sectors
• Accepts public deposit which is also the main source of such bank incomes

The Commercial Banks are further divided into three categories

• Public Sector - Where the majority stakeholders is government
• Private Sector - Where the majority stakeholders are private organizations or entities
• Foreign Bank - The headquarter of the bank are situated outside India

4. Regional Rural Bank - These types of banks provide loans on concessional interest rates to agriculture & rural sectors, these banks are joint ventures between the Central, State & Commercial banks
5. Specialized Banks - The specialized banks are incorporated for specific purposes, there are various types of specialized banks such as SIDBI, EXIM, NABARD.
6. Payment Banks - These are digital banking which are conceptualized by RBI, it provides mobile banking, ATM and debit cards. Some payments banks in India - Paytm Payments Bank, Airtel Payment Bank, Jio Payment Bank, NSDL Payment Banks.

Difference between NBFC & Banks

Article by

Farhan Hasmi a Legal Intern at Corpzo 

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