NBFC vs bank

NBFC vs bank is the question of which kind of licence is behind a loan in India. Both a bank and an NBFC, a non-banking financial company, can lend you money, and both are regulated by the RBI. But only a bank can open a savings account or a current account for you.

Here is the difference in plain terms. A bank takes deposits from the public in savings and current accounts, and lends out part of that money. It connects directly to payment systems such as UPI and NEFT. An NBFC lends money that it raises in other ways: from its owners, by borrowing from banks, or by selling bonds to investors. Some NBFCs may also take fixed deposits, with the RBI's permission, but no NBFC can give you a savings account or a cheque book. The RBI's rules for the two also differ. For example, a bank must keep part of its deposits with the RBI, and an NBFC does not have to.

Many loans are now applied for on an app, such as an instant personal loan app. The app itself is often neither a bank nor an NBFC. It is a lending service provider: a company that finds borrowers and runs the app for a licensed lender. Under the RBI's digital lending rules, the loan must go from the lender's account directly to the borrower's bank account, not through the app's own account. The app must also tell the borrower the name of the lender.

Take, for example, a family that borrows against its gold jewellery. The gold loan may come from a bank's branch, or from the branch of an NBFC that lends mainly against gold.

Consider co-lending. One loan is split between a bank and an NBFC: the NBFC finds and checks the borrower, and the bank provides most of the money, at a lower cost.

Say a small manufacturer applies for a working capital loan on an MSME lending platform. The platform often lends through its own NBFC, which raises its money from banks and investors, not from savings accounts.

How is this different from banking as a service? NBFC vs bank is about who holds the licence. Banking as a service is about how a company without a licence offers accounts and cards by using a bank's licence. A neobank app, for example, is usually neither a bank nor an NBFC: it offers accounts on a partner bank's licence.