NBFC vs Traditional Banking: Key Differences
TLDR: If you thought traditional banks are the only institutions that shape India’s financial ecosystem, think again. While banks have long been the cornerstone of financial services, Non-Banking Financial Companies (NBFCs) are rapidly gaining ground, especially in areas where traditional banking systems fall short. As of March 2023, NBFCs accounted for over 25% of the total credit flow in India, a number that reflects their growing importance.
So, what’s the buzz around NBFCs? Are they competitors to banks or complementary entities? This guide will walk you through the fundamental differences between NBFCs and traditional banks, helping you make informed decisions about which financial institution suits your needs.https://www.corpzo.com/nbfc-vs-traditional-banking-key-differences
Introduction
NBFC registration and banking services, both, play a vital role in India’s financial system. But the growing preference for alternative investment funds (AIFs) and specialized NBFC offerings—such as UPI-based services through Third-Party Application Providers (TPAPs)—demands a deeper understanding of their functions.
This guide will not only highlight key differences between NBFCs and traditional banks but also touch upon related compliance aspects, such as UPI-TPAP licenses, payment aggregator licenses, and the need for cosmetic licenses in regulated sectors. By the end, you’ll also discover why entrepreneurs must align with services like shop and establishment registration, IEC code procurement, NABH accreditation, and secretarial audits to meet various regulatory obligations.
Definition and Nature of Business
NBFCs (Non-Banking Financial Companies):
- NBFCs provide financial services like loans, leasing, and investments but cannot operate as banks due to their inability to accept demand deposits (savings or current accounts).
- Their core focus lies in offering credit to niche sectors, such as microfinance, vehicle financing, and SME lending, where banks may be reluctant to operate.
- Popular NBFCs in India include Bajaj Finserv, Mahindra Finance, and Muthoot Finance, which offer specialized services such as gold loans and consumer financing.
Fun Fact: NBFCs disbursed over ₹10 lakh crores in loans in FY 2022–23, highlighting their crucial role in supporting the economy.
Traditional Banks:
- Traditional banks are financial institutions governed by the Banking Regulation Act, 1949, offering a broad spectrum of services, including deposits, loans, credit cards, and remittances.
- They act as intermediaries, accepting deposits from customers and lending them to businesses, governments, and individuals. Examples include State Bank of India (SBI) and HDFC Bank.https://www.corpzo.com/nbfc-vs-traditional-banking-key-differences
