What is NBFC (Non-Banking Financial Company)? What are the differences between Bank and NBFC?

NBFC (Non-Banking Financial Company) is also a financial company that does money transactions. But, it is different from the bank. Some people consider NBFC companies as banks. It is just a part of the bank, not banking. The mode of investment of NBFC Financial Institutions is different from that of the bank.

What is NBFC (Non-Banking Financial Company)?

Non-Banking Financial Company

NBFCs are all the companies formed under the Companies Act 1956, which do money transactions like a bank, deposits people’s money in a deposit scheme, and give them many types of loans. This type of financial institution is called NBFC. The full form of NBFC is a Non-Banking Financial Company. It shares some part of the profit earned by depositing the depositor’s money in a scheme with the depositor. Such a company invests in deposits, insurance, loans, shares, stocks.

The work of all NBFCs is not under the Reserve Bank of India. The government set a different arrangement for the companies doing different works. Such as IRDA for insurance companies, Merchant Banking Company, Venture Capital Company, Securities and Exchange Board of India (SEBI) for Stock Broking Company, for Mutual Funds, National Housing Bank (NHB) for housing finance companies. The Department of Company Affairs (DCA) and the State Governments are responsible for chit-fund companies.

A Bank provides a facility like a credit card, debit card, passbook, checkbook, internet banking, money transfer but, the NBFC gets the bond of the money deposited. The main work of a Non-banking Financial company is the lending, insurance business, investing in various types of shares, bonds, stocks, debentures, securities, chit related activities. Till now, there is no such company in NBFC whose primary business is agriculture, industrial, trade-related activities, or construction/buying/selling of immovable property. If there was no section 45 of 1934, all companies would have been non-financial companies.

NBFC Rules Change

In the 1960s, deposits of many people in NBFCs were sunk. After this, the Reserve Bank of India (RBI) started monitoring NBFCs in 1963 and started making many new rules. Insurance companies also come within the NBFC companies. However, Insurance Regulatory and Development Authority (IRDA) regulates the NBFCs operating in the insurance sector.

Non-Banking Financial Companies (NBFC) are working in India and other countries. Such companies are called shadow banking systems in the world. If seen, it works like a bank. But, unlike banks, it does not get funds at a cheaper rate, which is why they borrow from banks and raise their funds through non-convertible debentures (NCDs) and commercial papers. Non-convertible debentures, issued for borrowing, are like a bond. NCDs cannot be converted into shares of the company.

What are the differences between NBFC and Bank?

Bank does all kinds of transactions. Banks and NBFCs do almost the same work but, there are some differences between NBFC and Bank

The full form of NBFC is a Non-Banking Financial Company. All NBFC companies are private. 

BanksNon-Banking Financial Company
Insures the customer on the money deposited under certain schemes of the bank.There is no insurance of any kind on deposits in NBFCs.
The operation of the bank is done under the Companies Act 1949.It is governed under the Companies Act 1956. Its registration with RBI is also necessary.
The scope of the bank is huge.NBFCs do not accept small and small savings.
The bank caters to all types of finance-related needs.NFBC does not invest in the construction of immovable properties, nor is it involved in any agricultural and industrial activities
The bank accepts demand deposits.NBFCs do not accept demand deposits.

NBFC FAQ

What is a non-financial banking company?

The company which does the work of accepting deposits and giving loans like a bank but is not a bank is called a non-financial company.

NBFCs are governed under which Companies Act?

NBFC is governed under the Companies Act 1956.

What is the difference between Bank and a Non-Banking Financial Company?

NFBC does not invest in immovable properties whereas, the bank invests in both movable and immovable properties.

Who is the bank?

A bank is called a financial institution that works to deposit money from the public and give loans to the public.

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