What is the difference between an investment bank and an NBFC?

Considering the work of both an NBFC and investment bank, you will get to know that both are the financial institutions. However, both of them differ hugely from each other. In this article, we will discuss some major differences between an investment bank and Non-Banking Financial Companies (NBFC).

What is an NBFC?

NBFC expands to a Non-Banking Financial Company that is incorporated under the Companies Act, 2013 and is regulated by the Reserve Bank of India (RBI) under the RBI Act, 1934. An NBFC is divided into three categories that are:

I. Asset Companies

II. Investment Companies

III. Loan Companies

What are investment banks?

Investment banks are the financial institutions that are authorized by the government bodies to conduct various banking activities like granting credits, accepting deposits, clearing cheques, general utility services and many more to the general public. Investment banks act as the intermediaries between the depositors and borrowers to ensure smooth functioning of the economy.

Although, investment banks and NBFC both are key financial intermediaries in terms of services provided to their customers while there are some major differences between them.

Difference between an investment bank and an NBFC

1. An NBFC is a recognized company that provides the banking facilities and services to people without having a bank license, whereas an investment bank is an authorized government financial intermediary that is built to provide banking services to the general public.
2. A non-banking financial company is incorporated under the Companies Act, 2013, while an investment bank is incorporated under the Banking Regulation Act, 1949.
3. An NBFC allows up to 100% of foreign investment while an investment bank of public sector allows only 74% of foreign investment.
4. Transaction services are not available in an NBFC whereas all the investment banks well-organized transaction services available for the general public like transfer of funds, overdraft facility, issue of traveler cheque and many more.
5. All the investment banks are involved in creating credits while none of the non-banking financial companies is involved in the creation of credits.
6. In an investment bank, public have the facility of deposit insurance by the Deposit Insurance and Credit Guarantee Corporation (DICGC), whereas such kind of facilities is not available in an NBFC.
7. Investment banks are an essential part of the payment and settlement cycle, whereas an NBFC has no role in it.
8. In an investment bank, it is mandatory to maintain reserve ratios like SLR or CRR. On the other hand, an NBFC does not require maintaining such reserve ratios.
9. Unlike an investment bank that can accept demand deposits, NBFC’s are not allowed to accept such kind of deposits that are repayable on demand.

Conclusion

Non- banking financial Companies are mainly established to grant the credits to the lower section of societies while banks are created by the government with a purpose to receive the deposits and grant credits on the basis of it to the public. Moreover, regulations related to the bank’s license are more stringent as compared to an NBFC license. Other than that banks don’t have authority to operate any kind of business other than banking while NBFC has the authority to operate other business than banking.

To get an NBFC registration or to get more information regarding Non-Banking Financial Company contact Swarit advisors.