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NBFC Series: What are NBFCs and how are they different from Banks?

Introduction

You must have definitely heard about Muthoot Finance Ltd at least once in your lifetime. It is India’s first Non-Banking Financial Company (“NBFC”). With the rise in the number of start-ups in our economy, NBFCs like Muthoot Finance are accelerating the process of providing quick financial assistance.
Let us understand what are NBFCs?
NBFCs are financial institutions, which are in the business of providing loans and advances, securities issued by the Government or local authorities. They provide these services without holding the license of a bank. However, they are registered with the Reserve Bank of India (“RBI”) for delivering their services.

What is the role of NBFC in economic development?

‘NBFCs essentially carry out para-banking services. They are authorized by RBI for providing these services.
The growth and penetration of NBFCs in the Indian economy has been remarkable. It is on account of the use of high-tech and new-aged technology. NBFCs make use of Artificial Intelligence (“AI”) for providing services including customer services, compliance, data handling and KYC processes.
They play a major role in providing financial help to Micro, Small and Medium Enterprises (MSMEs). Different types of NBFCs are catering the needs of upcoming industries. For Example: U Gro Capital, a NBFC listed on Bombay stock exchange, caters to very specific sectors like healthcare, education, auto components, etc.
NBFCs are facilitating the growth of start-ups in the country. This in-turn creates job opportunities, which is a direct parameter of holistic development of the country.

Is NBFC similar to a bank?

Both banks and NBFC are financial intermediaries but there are certain differences as well.

  1. A government authorised financial intermediary that aims at providing banking services to the general public is called the bank. An NBFC is a company that provides banking services to people without holding a bank license.
  2. NBFC is not allowed to accept such deposits which are repayable on demand. Unlike banks, which accept demand deposits.
  3. An NBFC cannot issue self-drawn cheques and demand draft.
  4. Banks create credit, whereas NBFC is not involved in the creation of credit.
    Conclusion
    Unlike NBFCs, banking regulations are more stringent. Hence, banks cannot provide any other services apart from banking business. As a result, it creates wider scope for business and diversifying the risk into market, making it more convenient form of intermediary.

Disclaimer: The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.

Key words: Non-Banking Financial Company, loans and advances, securities.

References: https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92

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