What is the Difference Between a Bank and NBFC?

When we think about money, the first thing that comes to mind is usually a bank. But did you know there’s another type of financial institution that provides similar services and still helps millions with loans and other financial products? These are NBFCs, or Non-Banking Financial Companies. Both banks and NBFCs provide financial services, but they are different. Knowing the key differences between NBFCs and banks in India can help you choose the right option for loans, investments, or other financial needs. Let’s see how banks and NBFCs are different and why both are important in India.

What are NBFCs?

An NBFC, or Non-Banking Financial Company, is a company registered under the Companies Act, 2013 and regulated by RBI under Chapter III-B of the RBI Act, 1934. RBI regulates NBFCs but they cannot accept demand deposits or savings accounts like banks. Unlike banks, NBFCs do not require a banking license. Their primary functions include lending funds, offering fixed deposits and investment products, distributing health/life/auto insurance, portfolio management, and more. To operate as an NBFC, a company must obtain NBFC registration (Certificate of Registration) from RBI.

Functions of NBFCs

Non-Banking Financial Companies (NBFCs) serve several functions in the financial sector, including:

• Role in the financial system: NBFCs support credit and investment activities across the economy.
• Loans and credit: They provide Personal Loans, home loans, asset financing, and microfinance to individuals and businesses.
• Investment and wealth management: NBFCs offer investment services, portfolio management, and financial planning.
• Payment and risk services: They facilitate online fund transfers, manage financial risks, and support housing and business finance.

What are the different types of NBFCs?

The list of NBFCs is extensive. Here are the most common types of NBFCs

1. Microfinance Companies As the name suggests, microfinance institutions give small loans, usually less than Rs 1,00,000. They help low-income people or new entrepreneurs who do not have collateral. Microfinance institutions registered as NBFCs-MFIs do not need a banking license like a bank, but must have a minimum net owned fund of Rs 5 crores. According to the rules, a lender cannot give more than 10% of the borrower's total assets. They offer these small loans as one of their main financial products to help people start or grow their businesses
2. NBFCs distributing insurance (NBFC-IFC) NBFCs distributing insurance products provide financial protection against unexpected events in life. They offer products for health, life, automobiles, homes, and loans. These NBFCs are regulated by both RBI and IRDAI to ensure safe and reliable operations. They play a vital role in the financial system, helping people and businesses secure their assets and plan for the future.
3. NBFC-Investment & Credit Companies (NBFC-ICC) These companies help people access Personal Loans, business credit, and investments. They are regulated by the RBI. Besides lending, they also offer fixed deposits, portfolio services, and infrastructure finance.  
4. NBFC-Asset Finance Companies (NBFC-AFC) These are firms that provide loans against assets like vehicles, machinery, and equipment. They finance equipment purchases and leasing. NBFC-AFCs offer financial services to individuals and businesses, helping them grow assets safely. Regulated by RBI, NBFC-AFCs are an important part of the financial system.
5. Venture Capital (VC) companies Most banks and non-banking financial companies do not give loans to start-ups. That’s where VC firms come in. They are private investors who provide funds to start-ups with high growth potential. VC companies also help these businesses make industry connections and guide them in using financial products wisely.
6. Nidhi Companies Nidhi companies are small financial firms that work only with their members. They can take deposits and provide loans or other financial products to members. Unlike a bank, Nidhi companies do not need a banking license from the RBI. These companies are common in southern India and mainly help members save money and borrow within their own group safely and easily.  

What are banks?

Banks are financial institutions that act as intermediaries between borrowers and depositors. Their main functions include accepting deposits, clearing cheques, managing withdrawals, granting credit, and paying interest. Banks play a vital role in the economy by providing these essential services. They work under the direct supervision of the RBI and, along with NBFCs, help meet the diverse financial needs of individuals and businesses.

Functions of Bank

Banks serve several essential functions in the economy, including:

• Banks are financial institutions that provide different types of bank deposits like savings, fixed, and current accounts.
• They offer loans to individuals and businesses to support diverse financial needs.
• Banks handle payment facilities, including fund transfers, cheque clearing, and other essential banking services.
• For safety, banks offer lockers to store valuables. They also deal in foreign exchange for international transactions and manage payments, such as salaries and bills, on behalf of clients.
• Banks help in credit creation by lending more than the deposits they receive. Along with this, banks offer investment products and provide guidance for managing portfolios.

What are the different types of banks?

The six most common types of banks in India are as follows:

1. Central bank The central bank of India is the RBI. It was founded on April 1, 1935, and it acts as the authority that oversees banks and non-banking financial companies. It issues currency, manages monetary policy, and keeps the financial system stable. All banks that require a banking license operate under the guidelines set by the RBI.
2. Cooperative banks Cooperative banks were created to promote social welfare. They follow RBI and state registrar regulations and mainly support agriculture and related activities. These banks offer financial services to individuals in rural areas and are organised into three tiers:
   • State-level
   • District-level
   • Primary (Rural-level)
3. Commercial banks Commercial banks are established under the Banking Regulation Act, 1949. Since banks are financial institutions, they operate in both urban and rural markets and rely on public deposits. These deposits are used to provide loan products, supporting the vital role of the financial sector. Commercial banks are divided into public, private, and foreign banks
4. Specialised banks Specialised banks are introduced by the Central Bank to meet unique sector needs. Examples include SIDBI, NABARD, and EXIM Bank. They support small industries, rural development, and export-related activities. These institutions often offer financial services similar to banks, but their focus is narrower and tailored to specific sectors.  
5. Payment banks Payment banks have become popular in India. They can accept deposits up to Rs 2 Lakh but cannot issue loans because they operate with services similar to banks but not full banking powers. Licensed separately by RBI, payment banks follow strict rules and deposit limits set by the RBI. They provide mobile banking, net banking, and debit card services
6. Regional Rural Banks (RRBs) RRBs are commercial banks created to support rural and agricultural credit. They hold a mix of ownership between the central government, state governments and sponsor banks. They play a vital role in the financial system by delivering credit to underserved regions, similar to how NBFCS play a vital role in extending credit across India.

Difference Between NBFC and Bank

When comparing NBFC vs bank, you will notice that both provide lending services; other than that, they differ significantly. Here are some crucial differences. 

Also Read: How to Choose the Best NBFC for a Personal Loan?

NBFCs vs Bank: Which is the best Option for a Personal Loan

Choosing between an NBFC and a bank for a Personal Loan depends on your needs, eligibility, and how quickly you need the money. NBFCS can provide loans with flexible checks and faster approval, while banks follow tighter rules because they require a banking license, often giving better rates and a wider range of financial products. If you want speed, an NBFC fits well. If you value lower costs, a bank may suit you better.

Risks Profile: NBFC vs Bank

The risk profile of NBFCs and banks differs mainly because of how they operate. NBFCS are not allowed to accept demand deposits, so they depend heavily on borrowed funds, which can raise their overall risk. They also work without a banking license, giving them more lending flexibility but less regulatory protection. Banks follow stricter supervision since they require a banking license, accept deposits,  and must keep enough money aside to stay safe and stable. This lowers their risk and protects customers better. Still, both play a vital role in the financial system, and the actual risk depends on the institution’s stability and management practices.

Conclusion

Banks and NBFCs both play a steady, essential role in the economy. They keep your money safe, help you earn interest, and provide loans when you need financial support. The key differences between NBFCs and banks include deposit acceptance, deposit safety, capital ratio rules, and the core financial services they offer. Banks can accept deposits, while NBFCs are not allowed to accept demand deposits. To choose between a bank or an NBFC, it’s important to understand how each financial institution works. Knowing all the points about them will help you make smarter financial decisions.

Frequently Asked Questions

Can NBFCs accept deposits like banks?

NBFCs cannot accept demand deposits, whereas banks can, as they require a banking license. This is one of the key differences between NBFCs and banks.

Why do NBFCs charge higher interest rates than banks?

NBFCs work without a banking license, rely on borrowed funds, and face higher risk, so their loan rates are usually higher. Banks follow stricter rules and have access to deposits, which allows them to offer lower rates.

Can NBFCs issue cheques or participate in payment systems?

No. NBFCs cannot issue cheques or join core payment systems. Banks have full access to payment and settlement systems because they are regulated and hold a valid banking license.

What is the role of NBFCs and banks in financial inclusion?

Both play a vital role in the financial system. Banks offer a wide range of financial products and reach both urban and rural customers. NBFCS play a vital role by offering credit in areas where banks may not operate, helping more people access financial services.

Which is better for a Personal Loan: NBFC or bank?

NBFCS can provide loans faster with flexible terms, while banks usually offer lower interest rates because they take deposits and are more regulated. Both have pros and cons, so the choice depends on your financial needs.

Are NBFCs and banks regulated by the RBI?

The Reserve Bank fully regulates banks. NBFCs are also monitored by the RBI, but are registered under the Companies Act, so the regulatory framework differs.

What documents are required to apply for a loan through an NBFC and a Bank?

Banks may ask for identity, address, income, bank statements, and sometimes employment documents due to stricter lending rules, while NBFCs often keep the process simpler. At Hero FinCorp, you need your KYC details to apply for a Personal Loan.