When exploring financial services in India, whether it is opening a savings account, applying for a personal loan, or investing, you’ll often come across two major types of financial institutions: Banks and Non-Banking Financial Companies (NBFCs). Though they may offer similar services, their structure, regulations, and scope are quite different.
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Let’s understand the difference between banks and NBFCs, how each functions, and which one may be more suitable for your financial requirements.
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What is a Bank?
A bank is a financial institution licensed by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949. Banks play a key role in the economy by accepting deposits from the public and offering loans to individuals, businesses, and institutions.
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Common Functions of Banks:
Accept savings, current, and fixed deposits
Provide loans and credit facilities
Issue debit and credit cards
Offer digital banking and fund transfer services
Act as intermediaries in foreign exchange transactions
What is an NBFC?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013, and regulated by the RBI under the RBI Act, 1934. Unlike banks, NBFCs are not allowed to accept demand deposits or issue cheques. However, they offer many financial products such as loans, investment services, asset financing, and insurance.
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Common Types of NBFCs in India:
NBFC-Investment and Credit Company (NBFC-ICC)
NBFC-Micro Finance Institution (NBFC-MFI)
Infrastructure Finance Company
Housing Finance Company (HFC)
Asset Finance Company (AFC)
Also Read: RBI Approved Loan Apps in India
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Key Difference Between Bank and NBFC
The following table highlights the main distinctions:
| Aspect | Bank | NBFC |
|---|---|---|
| Regulatory Authority | Regulated by RBI under the Banking Regulation Act, 1949 | Regulated by RBI under RBI Act, 1934 and Companies Act, 2013 |
| Deposit Acceptance | Can accept savings, current, and fixed deposits | Cannot accept savings or current deposits (some exceptions for fixed deposits) |
| Credit Creation | Can create credit and increase money supply | Cannot create credit; lends based on available funds |
| Cheque Facility | Can issue cheques on self | Cannot issue cheques |
| Account Opening | Offers savings and current accounts | Does not offer such accounts |
| Monetary Functions | Plays a direct role in monetary policy execution | Does not play a direct role in monetary policy |
| Loan Disbursal | Moderate to longer processing time | Quick loan processing with minimal documentation |
| Interest Rates | Generally lower | Comparatively higher due to flexible lending |
| Target Customers | Creditworthy individuals and businesses | People with poor or no credit score, underserved segments |
| CRR/SLR Requirements | Must maintain Cash Reserve Ratio and Statutory Liquidity Ratio | Not required (except large NBFCs under SBR norms) |
Types of Banks vs Types of NBFCs
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Types of Banks:
Public Sector Banks – Owned by the Government of India (e.g., SBI, PNB)
Private Sector Banks – Owned by private entities (e.g., HDFC Bank, ICICI Bank)
Regional Rural Banks (RRBs) – Serve rural areas and farmers
Foreign Banks – Operate in India with parent company abroad (e.g., Citibank)
Cooperative Banks – Operate under cooperative societies act
Types of NBFCs:
Loan Companies (LCs)
Investment Companies (ICs)
Micro Finance Institutions (MFIs)
Infrastructure Finance Companies (IFCs)
Core Investment Companies (CICs)
Regulatory Authority and Compliance
| Feature | Banks | NBFCs |
|---|---|---|
| Governing Acts | Banking Regulation Act, 1949 | Companies Act, 2013 and RBI Act, 1934 |
| Oversight | Full oversight by RBI | Regulated by RBI with limited intervention |
| CRR/SLR Mandates | Mandatory | Applicable only to large NBFCs |
The RBI introduced Scale-Based Regulation (SBR) in 2021 to improve governance among NBFCs, especially those with systemic importance.
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Credit Creation Capabilities
Banks are permitted to create credit by lending more than the actual deposits they hold, thanks to the fractional reserve system. This process increases liquidity in the economy.
NBFCs are not allowed to create credit. They can only lend the money they have raised through borrowings or capital investments.
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Deposit Acceptance
Banks can freely accept demand deposits, such as savings and current accounts. NBFCs cannot offer these services.
Only a few selected deposit-taking NBFCs (NBFC-D) can accept fixed deposits—and only under strict RBI guidelines.
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Interest Rates and Loan Processing
Banks generally offer lower interest rates because they have access to cheaper funds from deposits.
NBFCs offer loans at slightly higher rates but are more flexible with eligibility criteria.
NBFCs usually provide faster disbursal, often within 24–48 hours, compared to banks.
Target Audience
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Banks:
Individuals with stable income and strong credit profiles
Businesses with regular banking history
Government and institutional clients
NBFCs:
Self-employed professionals
Borrowers with low or no CIBIL score
Customers in semi-urban or rural areas with limited bank access
People needing small-ticket personal loans
NBFC vs Bank: Which to Choose for Loans?
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When to Choose a Bank:
You have a good credit score
You want lower interest rates
You’re applying for a large loan (e.g., home loan)
When to Choose an NBFC:
You need urgent or small-ticket finance
You have minimal documentation
You want quick disbursal
You have a low or poor CIBIL score
Conclusion
Both banks and NBFCs are essential to India’s financial system. While banks serve as the backbone of regulated finance, NBFCs have made credit accessible to underserved and remote sectors of the population.
By understanding the difference between bank and NBFC, you can make better financial decisions—whether you’re saving, investing, or borrowing.
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FAQs
Banks can accept savings and current deposits and create credit. NBFCs cannot perform these functions.
Yes, registered NBFCs are regulated by the RBI. Ensure you choose a reputed NBFC with transparent terms.
NBFCs are better for fast loan disbursal with minimal paperwork.
Most NBFCs do not issue debit cards, but some large NBFCs may offer credit cards in partnership with banks.
Yes, most NBFCs check CIBIL scores but may offer loans even with lower scores.
Disclaimer
This blog is for informational purposes only and does not constitute legal or financial advice. Please consult with a certified financial advisor or directly with the financial institution before making any loan or investment decision. Loan approvals are subject to the policies of the lender.
