Bank and NBFC

Bank
As per Section 5(b) of the Banking Regulation Act, 1949 ,
"banking" means the accepting, for the purpose of lending
or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise.

A bank is a financial institution that accepts deposits from

the public and creates credit. Lending activities can be
performed either directly or indirectly through capital
markets. Due to their importance in the financial stability of
a country, banks are highly regulated in most countries.
 Non-Banking Financial Company
(NBFC)
• A Non-Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956 engaged in
the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable
securities of a like nature, leasing, hire-purchase,
insurance business, but does not include any
institution whose principal business is that of
agriculture activity, industrial activity, purchase or sale
of any goods (other than securities) or providing any
services and sale/purchase/construction of immovable
property.
What does conducting financial activity as
“principal business” mean?
Financial activity as principal business is when a
company’s financial assets constitute more than 50 per
cent of the total assets and income from financial assets
constitute more than 50 per cent of the gross income.

A company which fulfils both these criteria will be

registered as NBFC by RBI.

The Reserve Bank has defined it so as to ensure that only

companies predominantly engaged in financial activity get
registered with it and are regulated and supervised by it.
 Examples
• https://rbi.org.in/Scripts/BS_NBFCList.aspx
 Difference
between Bank
and NBFC
Bank NBFC

As per Section 5(b) of the Banking NBFC is a company registered under

Regulation Act, 1949 , companies act 1956 and engaged in a
"banking" means the accepting, for the business of loans and advances,
purpose of lending or investment, of acquisition of shares,stocks,bonds etc
deposits of money from the public, issued by government or any other
repayable on demand or otherwise, authority.
and withdrawable by cheque, draft,
order or otherwise.

Banks have less reach NBFC have higher reach

Banks can issue cheque and demand NBFC’s can neither issue cheque nor
draft demand draft

Banks accept demand deposits as well NBFC’s accept only time deposits
as time deposits
Banks accept cash NBFC does not accept cash

Cheque books are issued by banks NBFC cannot issue cheque book,
they don’t perform clearing
functions.

Bank is incorporated under BR act NBFC is incorporated under

1949. Companies act 1956.

DICGC is applicable for banks DICGC is not applicable for NBFC

Foreign ownership of 74% is Foreign ownership of up to 100 per cent

permitted no one single foreign entity is allowed in NBFCs.
can hold more than 5 per cent. At present, there are over 12,000 NBFCs
and many are fully-owned owned by
foreigners.
Growth of NBFC’s in Indian
Economy
• NBFC’s existed since 1888 in India however flourished with
the boom on stock market in 1990’s.

• They outperformed banks because of the customised

services.

• They had greater reach.

• meeting the increasing financial needs of the corporate

sector.
• delivering credit to the unorganized sector and to small
local borrowers.

• NBFCs have enjoyed a more flexible structure than banks

in the organised sector.

• They lent small tickets personal loans.

• There asset/liabilities base was rapidly increasing.

• RBI then increased the regulations on NBFC

• Many corporate houses and banks floated there own
NBFC’s to tap the segments on which restrictions were
imposed by regulator.

• Banks were able to enhance their asset base by lending

through NBFC’s and the regulations became stringent in
Nov’2006 to avoid this.

• Two set of players emerged – small NBFC relying more

on deposit while large NBFC’s relied more on asset
financing.
• Profitability of NBFC was higher than banks.

• Their NPAs have grown however remained low

compared to banks.

• They are doing more of fee business and less of fund

based.

• Their focus is now on retail sector, housing finance,

personal loans , marketing of insurance products etc.
 Categories
of NBFC

NBFC not
NBFC accepting
accepting
deposits
deposits

NBFC-D,(deposit)
PRUDENTIAL
Assets <500 cr Assets>500 cr
REGULATIONS
APPLY

NBFC-ND-SI
NBFC-ND(non (non deposit-
deposit) systemically
important)

PRUDENTIAL
PRUDENTIAL
REGULATIONSD
REGULATIONS
DOES NOT
APPLY
APPLY
 Greater
Employment
Opportunities
and Standard of
Living

Growth
Strengthening
of
of Financial
National
Role of NBFC Market
Income
in economic
development

Supplying
Mobilisation
long-term
of Funds
credits
 Greater Employment Opportunities
and Standard of Living
• NBFCs help attain the objective of macroeconomic
policies of creating more jobs in the country by
promoting SMEs and private industries through lending
them loans.

• This increase in new businesses consequently raises

the demand for manpower and creates employment.
 Strengthening of Financial Market

• The financial market relies heavily on Non-banking

financial institutions for raising capital.

• The start-ups and small-sized businesses are

dependent on funds offered by NBFCs and also in order
to maintain liquidity.

• For an effective functioning and balance in the financial

market, NBFCs play a significant role.
 Supplying long-term credits
• NBFCs extend long-term credits to infrastructure,
commerce and trade companies.
• The traditional banks expect timely, schedules and
short-term repayment of loans that may not always
suit the requirements of these industries.
• NBFCs, on the other hand, fund large projects and so
promotes economic growth.
 Mobilisation of Funds
• Non-banking financial companies help in rotation of
resources, asset distribution and regulation of income
to shape the economic development.
• They enable converting saving into investments and
thus helps in the mobilisation of funds/resources in the
economy.
 Growth of National Income
• As NBFCs aim to build capital for several industries –
private and otherwise – they aid in accumulating a
capital stock for the country. This directly adds on to
the national income and results in the progression of
Gross Domestic Product (GDP).
 Recent RBI guidelines on NBFCs
• https://www.rbi.org.in/scripts/BS_ViewNBFCN
otification.aspx