What is the Difference Between a Bank and NBFC

Financial institutions are the backbone of modern economies, serving individuals, businesses, and governments alike. Among these, banks and Non-Banking Financial Companies (NBFCs) stand out as key players in meeting diverse monetary needs. But what sets them apart? 

This blog dives into the differences between banks and NBFCs, exploring their roles, regulations, and offerings to help you make informed financial decisions.

What is a Bank?

A bank is a government-authorized financial institution that accepts deposits from the public and provides loans, operating under strict regulations. In India, banks are governed by the Banking Regulation Act of 1949 and the Reserve Bank of India (RBI) Act of 1934. Commercial banks, the most common type, offer services like savings and current accounts, check facilities, and loans for personal or business needs, such as mortgages or small business financing.

Banks play a critical role in maintaining economic stability by facilitating payments, managing deposits, and creating credit. Their key functions include:

• Accepting demand and time deposits
• Issuing checks, drafts, and debit cards
• Providing loans and credit facilities
• Investing in securities
• Paying interest on deposits

Due to their systemic importance, banks are heavily regulated to ensure financial security and public trust.

What is a Non-Banking Financial Company (NBFC)?

An NBFC is a financial institution registered under the Companies Act of 2013 (or 1956, depending on its establishment) and regulated by the RBI. Unlike banks, NBFCs do not hold a banking license, which limits their scope of operations. They provide specialized financial services, such as business loans, equipment financing, gold loans, and investment products, but they cannot accept demand deposits (e.g., savings or current accounts).

NBFCs cater to niche markets and underserved segments, offering flexibility and faster loan approvals compared to banks. Their activities include:

• Accepting fixed and recurring deposits
• Offering loans against assets (e.g., gold, vehicles)
• Providing investment options like mutual funds and insurance
• Paying interest on deposits

As of 2025, NBFCs continue to grow in India, bridging gaps in financial inclusion where traditional banking falls short.

Banks vs. NBFCs: Key Differences

While both banks and NBFCs provide financial services, their operations, regulations, and offerings differ significantly. Here’s a detailed breakdown:

Regulation and Licensing

• Banks: Governed by the Banking Regulation Act of 1949 and the RBI Act of 1934, requiring a banking license.
• NBFCs: Registered under the Companies Act and regulated by the RBI, but without a banking license.

Services Offered

• Banks: Provide a wide range of services, including loans, credit cards, money transfers, and payment facilities (e.g., checks, online banking).
• NBFCs: Focus on niche offerings like mutual funds, insurance, stock investments, and asset-backed loans.

Deposit Handling

• Banks: Accept demand deposits (withdrawable anytime) and use them for lending.
• NBFCs: Accept only time-bound deposits (e.g., fixed deposits) and cannot offer demand deposit accounts.

Foreign Investment

• Banks: Limited to 74% foreign direct investment (FDI).
• NBFCs: Can accept up to 100% FDI, making them attractive for global investors.

Payment Systems

• Banks: Integral to the payment and settlement system (e.g., NEFT, RTGS).
• NBFCs: Do not participate in payment ecosystems.

Reserve Requirements

• Banks: Must maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per RBI mandates.
• NBFCs: Exempt from CRR and SLR requirements, allowing greater operational flexibility.

Deposit Insurance

• Banks: Deposits are insured up to ₹5 lakh per depositor by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• NBFCs: Lack deposit insurance, posing a higher risk to depositors.

Credit Creation

• Banks: Can create credit through fractional reserve banking.
• NBFCs: Cannot create credit, relying solely on existing funds.

Transactional Services

• Banks: Offer everyday services like cash withdrawals, debit cards, and online payments.
• NBFCs: Do not provide transactional banking services.

Comparison Table: Banks vs. NBFCs

FAQs

Why Aren’t NBFCs Considered Banks?

NBFCs operate under the Companies Act and lack a banking license, restricting them from accepting demand deposits or participating in payment systems.

How Do Banks Differ From Other Financial Institutions?

Banks uniquely accept demand deposits and facilitate daily transactions, setting them apart from other financial entities like NBFCs or mutual funds.

What Makes NBFCs Different From Banks in Lending?

NBFCs often offer faster loan approvals (sometimes within 24 hours) and cater to specific needs like gold loans or equipment financing, unlike banks’ broader lending scope.

Conclusion

Banks and NBFCs both play vital roles in the financial ecosystem, but they cater to different needs. Banks are your go-to for everyday banking—deposits, withdrawals, and payments—while NBFCs excel in specialized services like quick loans and investment options. In 2025, NBFCs continue to gain traction for their flexibility and accessibility, especially for small businesses and individuals overlooked by traditional banks.

Understanding these differences can help you choose the right institution for your financial goals. Whether you need a savings account or a business loan, banks and NBFCs offer unique strengths to meet your needs.