How does an NBFC differ from a bank?
A bank may accept money repayable on demand and is part of the payment system. An NBFC may lend, finance assets, and invest, but it cannot accept a savings or current-account deposit and it cannot issue a cheque drawn on itself. It still needs a certificate from the Reserve Bank before it starts that business.
What may a bank do?
A bank is licensed under the Banking Regulation Act, 1949, and is regulated by the Reserve Bank. It accepts savings, current, and term deposits. Because those demand deposits are part of the payment system, a bank issues cheques and moves money for customers. It also keeps the cash reserve ratio and the statutory liquidity ratio. Deposits with a bank are insured by the Deposit Insurance and Credit Guarantee Corporation up to ₹5 lakh for a depositor in that bank.
What may an NBFC not do?
An NBFC is a company that needs a certificate under section 45-IA before it commences or carries on the business of a non-banking financial institution. It can make loans and advances, finance assets, and invest. It cannot accept a demand deposit, and it is not part of the payment and settlement system, so it cannot issue a cheque on itself. An ordinary new certificate does not include permission to accept public deposits. Where a deposit-taking certificate does exist, those deposits are not insured by the Deposit Insurance and Credit Guarantee Corporation.
| Point | Bank | NBFC |
|---|---|---|
| Licence | Banking Regulation Act, 1949 | Certificate under section 45-IA |
| Demand deposits | Savings and current accounts | Not permitted |
| Cheque on itself | Part of the payment system | Cannot issue one |
| Reserve ratios | Cash reserve ratio and statutory liquidity ratio | Not those ratios |
| Deposit insurance | Up to ₹5 lakh | No equivalent cover |
A new Investment and Credit Company shows Net Owned Funds of ₹10 crore. The older ₹2 crore figure is not that threshold. How the fund is counted is on the net owned fund page, and how the certificate is obtained is on the NBFC page.
Which layer is the NBFC in?
The scale-based directions place the company in a layer, and the layer decides which supervisory returns it files. A non-deposit NBFC with assets below ₹1,000 crore is ordinarily in the base layer. A deposit-taking NBFC, and a non-deposit NBFC with assets of ₹1,000 crore or more, is in the middle layer unless the Reserve Bank has identified it for the upper layer. The top layer is kept empty unless the Reserve Bank decides otherwise. The returns for the layer are on the returns page. The 2020 NBS list is not that set.
Frequently asked questions
Four questions cover savings accounts, deposit insurance, the cash reserve ratio, and lending before the certificate.
Can an NBFC open a savings account for a customer?
No. An NBFC cannot accept a demand deposit. A savings account and a current account are demand deposits. A bank can accept them.
Are NBFC deposits insured like bank deposits?
No. Bank deposits are insured by the Deposit Insurance and Credit Guarantee Corporation up to ₹5 lakh for a depositor in a bank. An NBFC deposit does not have that cover.
Does an NBFC keep the cash reserve ratio?
No. The cash reserve ratio and the statutory liquidity ratio are bank requirements. A deposit-taking NBFC instead keeps the liquid assets the Reserve Bank prescribes against its public deposits.
Can a new NBFC lend before the certificate?
No. Section 45-IA requires the certificate before the company commences or carries on the business of a non-banking financial institution. A new Investment and Credit Company shows Net Owned Funds of ₹10 crore.
Sources
A bank is licensed under the Banking Regulation Act, 1949. An NBFC needs a certificate under section 45-IA of the Reserve Bank of India Act, 1934, and is then placed in a layer under the scale-based directions.