What are NBFC And Their Functions – Know what is NBFC and why is it different from Banking?

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What are NBFC And Their Functions

What is the full form of NBFC? Banking and Non-Banking Institutions (NBFCs) For years they have been acting as financial intermediaries for depositors and borrowers. Through this article we will know how they work and how they are different from each other. What is the difference due to which they are considered different? So let us know that Banking and Non-Banking Financial Companies (NBFC) What is the difference between. And know what is NBFC, importance of NBFC? The full form of NBFC is “Non Banking Financial Company”.

Let us tell you that NBFC is operated under the Companies Act, 1956. Investment in this is also not done like a bank. NBFC company first deposits people's money under a deposit scheme and then provides them many types of loans. To avail the benefits of such scheme, many people invest in it.

Difference Between Banking and Non-Banking Financial Companies (NBFC)

The bank provides the following services

  • Savings accounts
  • Provisions for fixed deposits
  • Commercial accounts
  • Personal and business loans
  • Mortgages
  • Credit and debit cards

NBFC or Non-Banking Finance Companies

Other financial institutions or non-banking finance companiesknown as NBFC (NBFC) Banks, also known as banks, provide similar banking services, but do not fall within the legal definition of being a bank. These are known as non-banking financial institutions. NBFC is also a financial company that works like a bank, which deals with money transactions, but one special thing about it is that it is completely different from a bank because it is not any type of banking. But this is only a part of the bank. NBFC, An essential role in the monetary sector and in running the economy efficiently Let's fulfill. They can work even without a license. Some of them are listed below

  • Payday lenders
  • Insurance firms
  • Currency exchanges
  • Check-cashing services
  • Hedge funds
  • Pawn shops

Non-banking financial institutions have a much wider customer range. Sometimes some customers do not fall within our standards. Therefore these financial institutions have a better chance of providing solutions to such customers.

For examples:

  • A customer may not have enough money to maintain the minimum balance, so he cannot open an account in a traditional bank.
  • People from low-income category, who find it difficult to get loans, can easily take loans from non-banking financial institutions.
  • People with low credit scores also face difficulty in getting credit from banks, so non-banking institutions provide a great alternative.
  • Hedge funds emphasize potential returns over investment risk. The unregulated way of non-banking institution allows managers to increase their chances of receiving higher payouts than a bank which would not provide such an opportunity in any case.
Difference Between Banking and Non-Banking Financial Companies (NBFC)
Banks NBFC (non-banking finance companies)
Definition Banks are government authorized financial intermediaries that provide all types of banking services to the people. NBFC does not hold a bank license but can still provide financial services to people
RBI’s FAQs Click Here Click Here
Demand Deposit Accepeted Does not accept
Foreign Investment Permission up to 74% for private sector banks Up to 100% is allowed
Maintenance of Reserve Ratios Mandatory Not Required
Credit creation Banks create credit NBFC do not create credit

Traditional Banking

Banks are fully regulated, and Top banks are nationalized Which means it is under government control. Regulations have put a constraint on the calculation of risks as well as the type of risks banks can take while investing or lending. It is very difficult for individuals with low credit to borrow money from any bank at a high rate of interest. . Banks have fixed rates for lending and the amount to lend, and they see no other means due to capital requirements.

What do non-banking financial institutions provide??

Non-banking institutions carry more risk than banks,

  • Lending to people with low or zero credit scores.
  • Some types of loans do not require security.
  • Offers flexible rates of interest and installments.
  • Payback period can also be decided for each loan

Non-banking institutions have provided many levels of comfort in providing loans and other banking options but there are also some kickbacks. Many times they charge very high interest rates. When the customer has no option when no bank is ready to lend then the customer can check these non-banking institutions.

Regulators of Non-Banking Financial Companies

Image Source:rbi.in

Below is a complete description of the different types of NBFCs and how they are regulated.

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