The entity that usually strikes our minds when we talk of deposits and availing of credit is a banking company. ‘Bank’ is a generalized term that we accord to businesses which operate in the field of lending. Rarely does the customer realize that the entity which financed her purchase for a consumer durable product is a non-banking finance company (NBFC). In rural areas, microfinance institutions (MFIs) operate as lenders of last resort since scheduled commercial banks (SCBs) customarily prefer project financing or lending to individuals with reliable credit history.
A new addition to this league is small finance banks (SFBs) and Payments Banks, entities that are set up with a view to cater to the needs of a changed financial landscape. It is thus significant to know key differences between these bodies so that we take informed financial decisions and approach the right institution for a specific need.
- Scheduled Commercial Banks
Entities that find a place in the second schedule of the RBI Act 1934 are referred to as SCBs and these include the widely known public sector banks of India, private banks like HDFC and ICICI, foreign banks operating in India and regional rural banks (RRBs).
- They can accept demand and time deposits and lend money without any obligatory cap on the interest rate to be charged.
- SCBs are regulated by the RBI, with a distinction of RRBs that come under the regulatory supervision of NABARD.
- Non-Banking Financial Companies
Although NBFCs work in a similar fashion as banking companies, the key dissimilarity here is that demand deposits cannot be accepted by NBFCs; this means you cannot have a savings bank account with any such entity.
- To tap the lucrative credit market and reap the benefits of technology, these institutions engage in the business of loans and advances and also in the acquisition of shares or like products.
- NBFC model has turned out to be a profitable business opportunity at a time when consumers look for easy and quick loans to buy products like cellphones or refrigerators. Bajaj Finance Limited is a renowned example here.
- There also exists a provision of ‘residuary non-banking company,’ an NBFC which is in the principal business of accepting public deposit in installments or as a lump-sum. One such entity is Sahara India.
- Microfinance Institutions
MFIs came into existence in the 1990s as entities that were ready to serve the marginalized. Individuals and small businesses with no credit history and a limited amount of documentation to avail credit from banks or NBFCs could find support in the MFI model.
- MFIs as such are not registered with the RBI; however, NBFC-MFIs come under the regulatory supervision of central bank.
- Similar to NBFCs, MFIs too cannot accept demand deposit from public.
- Their margin for lending is capped at 10 percent and they are usually funded by banks or other institutions for their lending operations.
- Small Finance Banks (SFC)
Many MFIs are applying for an SFC license with a view to formalizing their lending operations. Targeted to serve people in far-flung rural areas, SFCs have been conceptualized as banks that can carry out basic banking activities of accepting deposits and providing credit to underserved sections, including but not restricted to MSMEs, farmers and small-scale cottage industries. Similar to SCBs, SFCs too have to comply with CRR and SLR norms of the RBI.
- Payments Banks
Airtel, Paytm and some other players have forayed into the banking business. The catch here is these newly setup payments banks have many limitations on how they can operate.
- Deposits up to a maximum of INR 1 lakh can be accepted
- On these demand deposits, payments banks can decide their own rate of interest, Airtel for say is offering 7.25 percent interest to lure customers.
- Sanctioning loans or providing credit card to customers is prohibited under this model
- The basic intent of setting up these entities was to enable technologically advanced companies to open easy and quick savings accounts without much paperwork and trouble-free transfer of money from one account to other.
Also read: Decoding Payments Bank Concept and Viability
The thin line of difference between each stated lending entity is of utmost importance while deciding on the institution you want to partner with for your financial requirements.
Also read: Indian Bank’s Merger – A Good Idea?
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