What is an NBFC? How is it different from a Bank?

What is NBFC? What is the difference between Bank and NBFC?

What is NBFC?

We are living in a generation that likes to have their financial activities taken care of even before they drink their first cup of coffee!

And it is only fair. I mean, forget the millennials, why should anyone waste their precious time waiting for a simple approval? Thankfully, NBFCs just solve this problem.

What is NBFC?

NBFC stands for Non-Banking Financial Companies. NBFCs are companies that perform financial activities without holding a banking license. These companies entered the market not too long ago and are already becoming the raging trend in the financial world.

The credit for this goes to the ability of NBFCs to perform all the financial activities that one expects in the most simple, convenient & fastest way possible!

While net banking is also a viable option available with the same functions, they cater only to 34% of the overall population using financial facilities.

Usually, NBFCs are preferred over banks because they can serve a larger population and fit just right with the mentality of the generation. While there is no hard & fast rule for concluding that one is superior to the other, it all depends on your utility.

To understand what is a better option for you, it is important to know the key differences between an NBFC & a bank:

Differences between Banks and NBFC
1. Authorization

The biggest factor that sets an NBFC & bank apart is who are they authorized by.

To carry out all core functions such as creating credit, drawing cheques, and so on, a bank requires a banking license which is usually issued by the government.

While NBFCs don’t require a banking license, it doesn’t mean they don’t need any kind of authorization. A non-banking company usually needs an NBFC license which is authorized by the RBI.

2. Roles and Functions

While some functions may overlap between NBFCs and banks, there is a lot of difference between the activities they can and cannot carry out.

The primary reason for this is that a bank plays a vital role in the payment and settlement of the system.

Banks perform activities such as giving loans at a market interest rate, creating & distributing credit, depositing money, allowing demand deposits, making safe money transfers, managing withdrawals, clearing cheques & general utility financial services.

NBFCs perform activities such as lending loans (personal & business) & credit lines, distributing investment products, managing assets (if providing secured loans), depositing money (only for a short-term up to 60 months), and making online withdrawals.

Since NBFCs don’t hold a banking license, they cannot perform activities such as making demand deposits, creating credit, or clearing cheques drawn on themselves.

3. Application

Applying for an account at a bank looks very different from applying for an account at an NBFC.

The biggest difference lies in the amount of documentation and the speed of approval.While a bank will ask you for a lot of documentation such as your address proof, PAN card, nominee details, and so on, an NBFC takes only basic information of your PAN number.

More the documentation, more is the time is taken for approval. Hence,it may take 2-3 business days for a bank to get back to you with an approval, but an NBFC doesn’t take more than minutes!

4. Demand Deposits

Demand deposits are when a user can withdraw money from their account whenever they need without giving any prior notice or application.

Such accounts are also known as demand deposit accounts. Your savings account is the biggest example of the same.

Another important point of distinction is that a bank allows you to make a demand deposit, but an NBFC doesn’t. To withdraw money from an NBFC, you can send an application and get your money withdrawn.

5. Credit Facilities

Banks are authorized to create credit facilities on an interest rate based on the market value, while NBFCs do not take part in the creation of credit.

Hence, you can get a credit card from a bank, but with an NBFC you can only get a credit line.

Final Word

You need not sit with the dilemma of choosing between NBFC or bank. Banks & NBFCs are the dual intermediaries who are currently running the entire financial show of the country, so there is no right or wrong option.

NBFC would be the right fit if you are looking for an instant & convenient experience with a requirement of a low-ticket loan.

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