Difference Between NBFC and Bank

In a country like India with a huge population, it is impossible for banks to cater to all sections of the society as many areas are inaccessible and remote. Also, to provide banking facilities to the illiterate and the poor, finance institutions that work on similar lines as banks are required. In India, this requirement has traditionally been fulfilled by NBFC, or non banking financial company. As the name suggests, NBFC is not a bank though it performs many functions similar to that of banks. This article intends to find out the major differences between NBFC and banks and other features of these entities.

NBFC were created by the government of India as it felt the need to provide banking facilities to the poor and underprivileged who could not get access to banks. NBFC is required to be registered under the Companies Act 1956 to be able to perform functions similar to a bank. Normally, a NBFC is engaged in the business of loans and advances, acquisition of shares, debentures, stocks, bonds and securities issued by the government. It also indulges in hire-purchase, leasing, insurance and chit business.

However, there are several notable differences between NBFC and a bank.

1. NBFC cannot collect deposits in the manner of a bank

2. NBFC cannot issue checks drawn on itself

3. NBFC cannot issue Demand Drafts like banks

4. NBFC cannot indulge primarily in agricultural or industrial activity

5. NBFC cannot engage in construction of immovable property

6. NBFC cannot accept demand deposits

7. While banks are incorporated under banking companies act, NBFC is incorporated under company act of 1956

NBFC is required to register with Reserve Bank of India. There are many types of NBFC registered with RBI.

Equipment leasing company

Hire-purchase Company

Loan Company

Investment Company

Apart from these NBFC, there are many other residuary types of companies that are also classified as NBFC under the company act.