What is the difference between NBFCs and traditional banks?

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Non-Banking Financial Companies (NBFCs) are emerging as promising players in India’s rapidly transforming banking and financial sector. Meeting the demands of the underserved segments of the society NBFCs are playing a significant role in bridging the gap left by traditional banks. While the NBFCs are attracting a lot of consumers due to their diverse offerings and several users are now choosing NBFCs over banks, these institutions are still different from banks in terms, as far as their lending powers are concerned.

NBFCsDifferences between NBFCs and banks

Non-Banking Financial Companies cannot accept demand deposits. They cannot issue cheques drawn on itself.

These financial institutions cannot issue Demand Drafts like traditional banks. Depositors of NBFCs cannot avail Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation, unlike in case of banks.

While Non-Banking Financial Companies are incorporated under company act of 1956, banks are incorporated under banking companies act

Other features of NBFCs are:

Non-Banking Financial Companies can accept or renew public deposits for a minimum period of 12 months and maximum period of 60 months.

The repayment of deposits by NBFCs is not guaranteed by the Reserve Bank of India. The deposits made with Non-Banking Financial Companies are not insured.

Difference in fixed deposits of NBFCs and Banks

Non-Banking Financial Companies do accept fixed deposits like banks but there are some differences in their offerings.

Fixed deposits made with NBFCs are generally rated by the rating agencies in India. On the other hand, fixed deposits of banks are not rated by the rating agencies.

While the fixed deposit with banks are insured, fixed deposit with NBFCs are not insured.

For example, if there is a default of Rs one lakh and less, the Deposit Insurance and Credit Guarantee Corporation of India is bound to pay the insurance amount on a bank deposit.

In case of payment defaults by Non-Banking Financial Companies, the investor would lose the principal and insurance amount. NBFCs, in general offer higher interest rates as compared to bank deposits.

Lending differences:

While banks generally target the corporates as well as retailers, Non-Banking Financial Companies are more inclined towards the retail sector. NBFCs lay major emphasis on the Micro, Small and Medium Enterprises (MSMEs).

Credit Card:

While traditional banks have the authority to issue credit cards depending on the eligibility of its consumers, NBFCs cannot issue any credit card to its consumers.

Rating differences:

There is a major difference between banks and Non-banking Financial Companies as far as ratings are concerned. While deposits of NBFCs are rated by the ratings agencies, banks do not have to go through any such process.

The deposits of banks are not rated.

Consumers often choose their deposits on the basis of this key feature. It is important to note that deposits with NBFCs are not insured while banks offer a secured deposit.

It is therefore a wise decision to check the ratings of NBFCs before investing in them. It is good to go with a Non-banking Financial company that is rated as AAA. This way the deposit of the consumer will be safe and the investor will get his/her interest and principal amount on time.

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