Governments, local authorities, or competent business houses issue these market instruments. However, as per the RBI policy, it cannot include any institution whose main 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 the immovable property.
Non-banking financial companies play an extraordinary part in the economy by carrying out numerous types of financial activities. NBFC play a role akin to that of the bank, however, it must be noted that an NBFC is different from a bank, although both of them are regulated and supervised by the Reserve Bank of India and are key financial intermediaries
A few of the major differences between the NBFC (such as Bajaj Finance) and a regular bank (such as State Bank of India) are as follows:
- An NBFC is a financial company that offers banking services to people without holding a banking license, whereas a bank is a government authorized financial institution which has a banking license and aims to provide banking services to the general public.
- Unlike a bank, an NBFC cannot issue a self-drawn cheque or a demand draft.
- NBFCs are not required to maintain a reserve with the RBI whereas the Banks are required to maintain a reserve such as CRR and SLR with the RBI. This makes banks a safer option for investments with a lower guaranteed return.
- Another key point of difference between the two is ratings. For example, the deposits of NBFCs are rated by agencies such as CRISIL, while the deposits of banks are not. Thus the bank deposits are considered to be very safe, while the former is not. It must be remembered that the deposits from Non Banking Finance Company are not guaranteed while that of banks are. In general, the good quality deposits of NBFCs are AAA rated, which ensures the safety and timely payment of interest and principal amount. Bank deposits do not have any such rating provided by an agency.
- Banks are an integral part of the payment and settlement cycle while NBFC is not a part of the system.
- Deposit Insurance and Credit Guarantee Corporation (DICGC) allow the deposit insurance facility to the depositors of banks. Such facility is unavailable in the case of NBFC.
- Banks create credit, whereas NBFC is not involved in the creation of credit.
- The deposits with NBFCs are not insured whereas the deposits made with banks are covered by insurance.
We hope you find the information provided above to be useful. Please visit our website to learn more about India’s financial industries.
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