Difference Between Banks and NBFCs: Concepts and Features

Published on 24 October 2025 by
Difference Between Banks and NBFCs

In the field of banking awareness, understanding the difference between Banks and Non-Banking Financial Companies (NBFCs) is extremely important for competitive exams like IBPS, SBI, and RBI. Both banks and NBFCs play a key role in India’s financial system by providing credit and financial services, but they differ in structure, regulation, and functions.

What is a Bank?

A Bank is a financial institution authorized to accept deposits from the public and lend money. Banks perform core banking activities such as accepting savings and current deposits, providing loans, issuing cheques, and enabling money transfers. They are governed by the Banking Regulation Act, 1949 and are regulated by the Reserve Bank of India (RBI). Banks are fundamental to the financial system as they mobilize public savings and create credit for individuals and businesses.

What is an NBFC?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 (or 2013) that provides financial and investment services similar to banks but cannot perform full banking functions. NBFCs offer loans, advances, asset financing, and investments in shares or bonds. However, they cannot accept demand deposits like savings or current accounts. NBFCs primarily serve as alternative financing channels, reaching sectors not fully served by traditional banks.

Key Differences Between Banks and NBFCs

The differences between banks and NBFCs can be highlighted across several parameters:

BasisBanksNBFCs
Regulating AuthorityRegulated by RBI under Banking Regulation Act, 1949Registered under Companies Act and partly regulated by RBI
Acceptance of DepositsCan accept both demand and time depositsCannot accept demand deposits; only some NBFCs can accept fixed deposits with RBI approval
Payment System RolePart of payment and settlement system; can issue chequesNot part of payment and settlement system; cannot issue cheques
Deposit InsuranceCovered under DICGC insurance up to ₹5 lakh per depositorNo deposit insurance facility
Credit CreationCan create credit and issue loans directlyCannot create credit in the same way as banks
Registration RequirementMust have a banking license from RBIMust obtain a Certificate of Registration (CoR) from RBI to operate as NBFC
ExamplesSBI, HDFC Bank, PNBBajaj Finance, Mahindra Finance, Shriram Transport Finance

Classification of NBFCs

NBFCs are classified based on their activities and the type of liabilities they hold.

1. Based on Liability:

  • Deposit-taking NBFCs (NBFC-D): These NBFCs are allowed to accept fixed deposits from the public with RBI approval.
  • Non-deposit taking NBFCs (NBFC-ND): These NBFCs are not permitted to accept public deposits.

2. Based on Activity:

  • Asset Finance Company (AFC): Provides financing for physical assets such as vehicles or machinery.
  • Loan Company (LC): Offers personal or business loans.
  • Investment Company (IC): Invests in securities such as shares and bonds.
  • Infrastructure Finance Company (IFC): Provides long-term finance for infrastructure projects.
  • Micro Finance Institution (MFI): Offers small loans to low-income individuals or self-help groups.

Capital and Net Owned Fund Requirements

To operate, NBFCs must maintain a minimum Net Owned Fund (NOF) as per RBI norms. Initially, the minimum NOF was ₹2 crore, which has been gradually raised to ₹10 crore in a phased manner (2022–2027). Certain categories like Venture Capital Funds, Insurance Companies, and Stock Exchanges are exempted since they are regulated by other authorities such as SEBI or IRDAI.

Regulation and Supervision

Banks are fully regulated by the RBI and must maintain statutory ratios like CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio).

NBFCs, though regulated by the RBI, face fewer restrictions. They are not required to maintain CRR or SLR, but must obtain a Certificate of Registration (CoR) from the RBI before commencing operations.

Role in the Financial System

Both banks and NBFCs play crucial roles in India’s financial ecosystem:

  • Banks: Form the foundation of the formal financial system by mobilizing savings and providing credit to individuals and businesses.
  • NBFCs: Complement banks by extending credit to unbanked and underbanked sectors, particularly small-scale industries, micro-entrepreneurs, and rural borrowers.

Conclusion

While both banks and NBFCs are vital to India’s economic growth, they differ in scope and regulatory framework. Banks perform full-scale financial operations under strict RBI supervision, whereas NBFCs serve as alternative financing channels, offering flexibility and accessibility to various customer segments. Understanding these distinctions is essential for anyone preparing for banking and finance exams.

Frequently Asked Questions (FAQs)

Q1: What is the main difference between a bank and an NBFC?
A1: Banks can accept demand deposits and are part of the payment system, whereas NBFCs cannot accept demand deposits or issue cheques.

Q2: Who regulates NBFCs in India?
A2: NBFCs are primarily regulated by the Reserve Bank of India (RBI) under the RBI Act, 1934, but they are registered under the Companies Act, 2013.

Q3: Can NBFCs issue cheques like banks?
A3: No, NBFCs cannot issue cheques because they are not part of the payment and settlement system.

Q4: What is the minimum capital requirement for NBFCs?
A4: As per recent RBI guidelines, NBFCs must maintain a minimum Net Owned Fund (NOF) of ₹10 crore in a phased manner.

Q5: Why are NBFCs important for the economy?
A5: NBFCs promote financial inclusion by providing credit and financial services to sectors and individuals not served by traditional banks, especially in rural and semi-urban areas.