TLDR: If you thought traditional banks are the only institutions that shape India’s financial ecosystem, think again. While banks have long been the cornerstone of financial services, Non-Banking Financial Companies (NBFCs) are rapidly gaining ground, especially in areas where traditional banking systems fall short. As of March 2023, NBFCs accounted for over 25% of the total credit flow in India, a number that reflects their growing importance.

So, what’s the buzz around NBFCs? Are they competitors to banks or complementary entities? This guide will walk you through the fundamental differences between NBFCs and traditional banks, helping you make informed decisions about which financial institution suits your needs.
 

Introduction

NBFC registration and banking services, both, play a vital role in India’s financial system. But the growing preference for alternative investment funds (AIFs) and specialized NBFC offerings—such as UPI-based services through Third-Party Application Providers (TPAPs)—demands a deeper understanding of their functions.

This guide will not only highlight key differences between NBFCs and traditional banks but also touch upon related compliance aspects, such as UPI-TPAP licenses, payment aggregator licenses, and the need for cosmetic licenses in regulated sectors. By the end, you'll also discover why entrepreneurs must align with services like shop and establishment registration, IEC code procurement, NABH accreditation, and secretarial audits to meet various regulatory obligations.
 

Definition and Nature of Business

NBFCs (Non-Banking Financial Companies):

  • NBFCs provide financial services like loans, leasing, and investments but cannot operate as banks due to their inability to accept demand deposits (savings or current accounts).

  • Their core focus lies in offering credit to niche sectors, such as microfinance, vehicle financing, and SME lending, where banks may be reluctant to operate.

  • Popular NBFCs in India include Bajaj Finserv, Mahindra Finance, and Muthoot Finance, which offer specialized services such as gold loans and consumer financing.

Fun Fact: NBFCs disbursed over ₹10 lakh crores in loans in FY 2022–23, highlighting their crucial role in supporting the economy.
 

Traditional Banks:

  • Traditional banks are financial institutions governed by the Banking Regulation Act, 1949, offering a broad spectrum of services, including deposits, loans, credit cards, and remittances.

  • They act as intermediaries, accepting deposits from customers and lending them to businesses, governments, and individuals. Examples include State Bank of India (SBI) and HDFC Bank.

Stat Alert: As of March 2023, India had over 1,20,000 bank branches, reflecting the extensive reach of traditional banks.
 

Regulatory Oversight

NBFCs:

  • Regulated by the Reserve Bank of India (RBI) under the RBI Act, 1934, NBFCs follow lighter regulations compared to banks.

  • However, some NBFCs, such as those engaged in housing finance or insurance, fall under the purview of NHB (National Housing Bank) and IRDAI.

  • NBFCs must register with the RBI if their assets exceed ₹100 crores, ensuring transparency and accountability.

Traditional Banks:

  • Banks face stringent regulatory requirements under multiple frameworks, including the Banking Regulation Act and the RBI Act.

  • The RBI monitors banks’ capital adequacy ratios, liquidity, and compliance with Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) norms.

  • Regular audits, inspections, and RBI’s oversight ensure that banks remain financially healthy.

Did You Know? Traditional banks must maintain CRR and SLR to mitigate insolvency risks, a critical difference from NBFCs.
 

Deposit-Taking Abilities

NBFCs:

  • NBFCs cannot accept demand deposits, meaning customers cannot open savings or current accounts with them.

  • Some NBFCs may accept fixed deposits, but only under specific guidelines and with limits on withdrawal flexibility.

Traditional Banks:

  • Banks are licensed to accept deposits, offering customers a variety of account options, such as savings, current, and fixed deposit accounts.

  • They provide withdrawal facilities through ATMs, cheque books, and online banking portals, giving them a distinct edge in convenience.
     

Access to Payment Systems

NBFCs:

  • NBFCs do not have direct access to payment systems such as NEFT, RTGS, and IMPS, relying on partner banks to process transactions.

  • This lack of access means that NBFCs cannot offer real-time payments directly to their customers.

Real-World Impact: For instance, an NBFC offering a loan might have to partner with a bank to process EMI payments, leading to slight delays.

Traditional Banks:

  • Banks have direct access to payment infrastructure, offering instant fund transfers, UPI payments, and real-time remittances.

  • They also manage debit and credit card networks, enabling seamless customer transactions across multiple platforms.
     

Credit Creation and Lending Practices

NBFCs:

  • NBFCs do not engage in credit creation like banks since they cannot accept demand deposits. However, they offer innovative lending products targeting niche sectors, such as microfinance and consumer electronics financing.

  • NBFCs are known for quick loan approvals, making them a preferred choice for individuals and businesses in need of urgent credit.

Interesting Fact: Many fintech startups are now NBFC-licensed, combining technology with flexible lending models to enhance customer experiences.

Traditional Banks:

  • Banks play a critical role in credit creation, lending out a significant portion of their deposits to businesses and individuals.

  • Through this process, banks multiply the money supply, stimulating economic growth and maintaining liquidity in the market.
     

Regulatory Capital Requirements

NBFCs:

  • NBFCs must maintain a minimum Net Owned Fund (NOF) of ₹2 crores to operate, but they are not required to maintain CRR or SLR like banks.

  • This makes them more flexible in deploying their funds but also slightly riskier.

Traditional Banks:

  • Banks must adhere to CRR and SLR ratios, which ensure that they maintain adequate reserves to meet liquidity demands.

  • These requirements create a buffer against financial shocks but can limit the banks’ ability to lend freely.
     

Risk and NPA Levels

NBFCs:

  • Since NBFCs often lend to high-risk sectors (e.g., unsecured loans, small businesses), they may have a higher Non-Performing Asset (NPA) ratio compared to banks.

  • However, their specialized knowledge of niche markets allows them to mitigate risks effectively.

Insight: NBFCs like Muthoot Finance have thrived by offering gold loans, despite the risks associated with fluctuating gold prices.

Traditional Banks:

  • Banks have a diversified loan portfolio, lending across sectors such as corporates, retail, agriculture, and real estate.

  • With better risk management systems, banks generally maintain lower NPAs than NBFCs.
     

Customer Base and Loan Size

NBFCs:

  • NBFCs cater to small businesses, rural customers, and startups, offering quick and small-ticket loans.

  • Their flexibility makes them attractive to borrowers with low credit scores or limited documentation.

Traditional Banks:

  • Banks primarily serve large corporations, SMEs, and individual customers, offering larger loans with longer tenures.

  • While banks provide competitive interest rates, their eligibility criteria are often more stringent.
     

Customer Service and Financial Inclusion

NBFCs:

  • NBFCs play a key role in promoting financial inclusion by penetrating rural areas and serving underserved populations.

  • Their personalized services and quick decision-making give them a competitive edge over banks in certain markets.

Traditional Banks:

  • Banks offer comprehensive services through their branch networks and digital platforms but may not be as agile as NBFCs in meeting niche demands.

  • However, initiatives like the Jan Dhan Yojana reflect banks’ efforts toward financial inclusion.
     

Conclusion: Choosing Between NBFCs and Banks

Both NBFCs and traditional banks are crucial to India’s financial ecosystem, but they cater to different needs. NBFCs excel at offering quick, customized credit solutions, making them ideal for borrowers who need flexibility. On the other hand, traditional banks provide a wider range of services with higher trust and regulatory oversight, making them the backbone of economic stability.
 

Why Choose Corpzo?

Whether you are planning to launch an NBFC, secure a payment aggregator license, or obtain NABH accreditation, Corpzo provides comprehensive compliance support. We handle everything from private and public limited company registrations to IEC code issuance and secretarial audits, ensuring smooth operations. Call +91 9999 139 391 or WhatsApp for free consultation.