A bank is an institution which accepts deposits from the public and in turn advances loans by creating credit. The act of lending and borrowing creates both credit and debit.
“Debt represents money that has been borrowed but not yet been paid back, Credit represents money available to be borrowed.”
The deposits accepted by the bank are considered to be its liabilities, whereas the loans/advances extended are considered as assets of bank.
Non-banking Financial Company (NBFC)
NBFCs are those which provide banking services without meeting the legal definition of a bank. An NBFC is incorporated under the Companies Act, 2013 and are desirous of commencing business of non-banking financial institution as under Section 45I(a) of the RBI Act, 1934.
However, the companies cannot be NBFCs if their primary business is related to agricultural activity, industrial activity, sale/purchase/construction of immovable property.
Usually the 50-50 test is used as an anchor to register an NBFC with RBI. 50-50 means that the companies at least 50% assets are financial assets and its income from financial assets is more than 50% of the gross income.
What is difference between banks & NBFCs?
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
Basic | NBFCs | Banks |
Meaning | They provide banking services to people without holding bank license | It is a government authorized financial intermediary which aims at providing banking services to the public |
Regulated by | Companies Act 2013 | Banking Regulation Act 1949 |
Demand Deposit | Cannot be accepted | Can be accepted |
Foreign investment | Allowed up to 100% | Allowed up to 74% for private sector banks |
Payment and settlement system | Not a part of the system | An integral part of the system |
Maintenance of Reserve Ratios | Not required | Mandatory |
Deposit Insurance Facility | Not available | Available |
Credit creation | NBFC does not create credit | Banks create credit |
Transaction services | Cannot be provided by NBFC | Provided by banks |