What is a Bank
A Bank is a financial institution which performs the
deposit and lending function.
A bank allows a person
with excess money (Saver) to deposit his money in the bank and earns an interest rate.
Similarly, the bank lends
to a person who needs money (investor/borrower) at an interest rate.
Banks may also provide financial services such as wealth management, currency
exchange, and safe deposit boxes. There are several different kinds of banks
including retail banks, commercial or
corporate banks, and investment banks. In most countries, banks are regulated
by the national government or central bank.
Banks operate by borrowing funds-usually by accepting
deposits or by borrowing in the money markets. Through the process of taking
deposits, making loans, and responding to interest rate signals, the banking system helps channel
funds from savers to borrowers in an efficient manner
Definition of Bank
Banks are the financial institutions, authorised by the
government to conduct banking activity like accepting deposits, granting
credit, managing withdrawals pay interest, clearing cheques and providing
general utility services to the customers. Banks are the apex organisation,
which dominates the entire financial system of the country. It acts as a
financial intermediary, between the depositors and borrowers, that ensures
smooth functioning of the economy.
Banks can be public sector banks, private sector banks
or foreign banks. They are responsible for making loans, creating credit,
mobilisation of deposits, safe and time bound transfer of money and
providing public utility services. Ownership of a commercial bank lies with the
shareholder and they are operated with the profit motive.
Types of Banks
Broadly speaking, banks can be classified into commercial
banks and central bank. Commercial banks are those which provide banking
services for profit. The central bank has the function of controlling
commercial banks and various other economic activities. There are many types of
commercial banks such as deposit banks, industrial banks, savings banks,
agricultural banks, exchange banks, and miscellaneous banks.
Banks
are further segregated into four types.
Commercial Banks : These banks are
regulated by Banking Regulation Act, 1949. They accept the public deposit from
the public for lending or investment.
Cooperative Banks: Cooperative
banks are undertaken by the State Cooperative Societies Act and give cheap
credit to their members. The rural population is dependent on the cooperative
banks for its financial backup.
Specialized Banks: These banks
provide financial help to special industries, foreign trade, etc. Few examples
of specialized banks are foreign exchange banks, export and import banks,
development banks, etc.
Central Banks: These banks
manage, check, and monitor all the activities of the commercial banks of a
country.
Types of Commercial Banks
(1)
Public sector banks
·
Public sector banks are those banks in which
the major holding is of the government.
·
Examples: SBI, PNB, OBC, etc.
(2) Private sector banks
·
Private sector banks are those banks that are
owned, controlled, and managed by private promoters.
·
They operate according to the market forces.
·
Examples: HDFC, ICICI, Kotak Mahindra, etc.
What is Banking?
Banking is directly or indirectly
connected with the trade of a country and the life of each individual. It is an
industry that manages credit, cash, and other financial transactions. In
banking, the commercial bank is the most influential institution for any
country’s economy or for providing any credit to its customers.
In India, a banking company is
responsible for transacting all the business transactions including withdrawal
of cheques, payments, investments, etc. In other words, the bank is involved in
the deposit and withdrawal of money, repayable on demand, savings, and earning
a decent amount of profits by lending money.
Banks also help to mobilise the savings
of an individual, making funds accessible to businesses and help them to start
a new venture.
However, unlike commercial banks,
private sector banks are owned, operated, and regulated by private investors
and have the right to operate according to the market forces.
What is
importance of bank?
A well-functioning financial system is
fundamental to a modern economy, and banks perform important functions
for society. They must therefore be secure. Banks should be
able to lend money to consumers and businesses in both upturns and downturns.
Relationship
between a Banker and Customer
The relationship between the banker and
customer is very important. Both serve the society to grow and the economy to
expand. It is generally studied under the following two categories.
- General
Relationship
- Special
Relationship
General Relationship
Debtor and Creditor :
The true relationship between banker and
customer is primarily of a debtor and creditor. When customer deposits money
with a bank, the bank then is the debtor and the customer is the creditor. The
customer expects from the bank that His money will be kept safe by the bank, it
will be returned on demand within business hours and the money will be intact
and safe and will give return (interest). The position is reversed if the
customer is advanced loan then the banker becomes creditor and the customer is
debtor.
Special Relationship
- Principal
and agent:
The
special relationship between the customer and the banker is that of principal
and agent. The customer (principal) deposits checks, drafts, dividends for
collection with the bank. He also gives written instructions to the bank to
purchase securities, pay insurance premium, installments of loans etc on his
behalf. When the bank performs such agency services, he becomes an agent of his
customer.
- Bailer
and Bailment relationship
A
bailment is the delivery of goods in trust. A bank may accept the valuables of
his customer such as jewellary, documents, and securities for safe custody. In
such a case the customer is the Bailer and the bank is bailee. The bank
(bailee) charges a very small amount as service charges for safe custody of the
valuables from his customer (bailer). This relationship between the bank and
the customer as bailee and bailer started from the days of earlier goldsmiths.
- Pawner
and Pawnee:
When
a customer Pledge goods and documents as security for an advance he then become
Pawner (Pledger) and the bank becomes the Pawnee (pledgee). The pledged goods
are to be returned intact to the pawner after the debt is repaid by him.
- Mortgager
and Mortgagee relationship
Mortgage
is the transfer of an interest in specific immovable property for the purpose
of securing the payment of money advanced or to be advanced by way of loan.
When a customer pledges a specific immovable property with the bank as security
for advance, the customer becomes mortgager and banker is the mortgagee.
- Bank
as a trustee
The
bank can act as a trustee for his customer. When the banker accepts securities
and other valuables for safe custody is called that it is acting as trustee. In
such cases the customer continues to be the owner of the valuables deposited
with the bank. The bank also acts as executor, attorney and guarantor for his
customer.
What is NBFC?
As finance is the
basic requirement of individual’s and business’s, banks alone cannot cater all
the sections of the society. That is why NBFC came into being, both in
public and private sector, to complement banks in providing finance to
people.
Definition of NBFC
NBFC expands to Non-Banking Financial Company is a company registered
under the Companies Act, 1956 and regulated by the Central Bank
i.e. Reserve Bank of India under RBI Act, 1934. These entities are not
banks, but they are engaged in lending and other activities, akin to that of
banks like providing loans and advances, credit facility, savings and
investment products, trading in the money market, managing portfolios of
stocks, transfer of money and so on.
It is indulged in the activities of hire purchasing, leasing,
infrastructure finance,venture capital finance, housing finance, etc. An NBFC
accepts deposits, but only term deposits and deposits repayable on demand
are not accepted by it.
A Non-Banking Financial Company (NBFC)
is a company registered under the Companies Act, 1956 engaged in the business
of loans and advances, acquisition of shares/stocks/bonds/debentures/securities
issued by Government or local authority or other marketable securities of a
like nature, leasing, hire-purchase, insurance ...
How is NBFC different from bank?
An NBFC is a company that provides banking services
to people without holding a bank license. An NBFC is
incorporated under the Indian Companies Act, 1956 whereas a bank is
registered under Banking Regulation Act, 1949. NBFC is
not allowed to accept such deposits which are repayable on demand.
Why
are NBFC better than banks?
As compared to banks, NBFCs follow
more flexible approach to avail a business loan. They make it easy for the
customers to avail fast and quick financing. Inspite of having a low credit
score one can effortlessly avail for a business loan from a leading NBFC.
While banks and non-banking financial companies (NBFC) both are key
financial intermediaries, that offer almost similar services to the customers.
The major difference between NBFC and bank is that unlike banks,
an NBFC cannot issue self-drawn cheques and demand drafts.
Another important
point of distinction amidst these two is that while banks take part in the
country’s payment mechanism, non-banking financial companies are not involved
in such transactions.
COMPARISON CHART
Key Differences Between NBFC and Bank
The difference
between NBFC and bank can be drawn clearly on the following grounds:
- A government
authorised financial intermediary that aims at providing banking services
to the general public is called the bank. An NBFC is a company that
provides banking services to people without holding a bank license.
- An NBFC is
incorporated under the Indian Companies Act, 1956 whereas a bank is
registered under Banking Regulation Act, 1949.
- NBFC is not
allowed to accept such deposits which are repayable on demand. Unlike
banks, which accepts demand deposits.
- Foreign
Investments up to 100% is allowed in NBFC. On the other hand, only banks
of the private sector are eligible for foreign investment, and that would
be not more than 74%.
- Banks are an
integral part of payment and settlement cycle while NBFC, is not a part of
the system.
- It is mandatory
for bank maintain reserve ratios like CRR or SLR. As opposed to NBFC,
which does not require to maintain reserve ratios.
- The deposit
insurance facility is allowed to the depositors of banks by Deposit
Insurance and Credit Guarantee Corporation (DICGC). Such facility is
unavailable in the case of NBFC.
- Banks create
credit, whereas NBFC is not involved in the creation of credit.
- Banks provide
transaction services to the customers, such as providing overdraft
facility, the issue of traveller’s cheque, transfer of funds, etc. Such
services are not provided by NBFC.
Conclusion
NBFC’s are mainly
established to grant credit to the poor section of the society, whereas the
banks are chartered by the government to receive deposits and grant credit to
the public. The licensing regulations of a bank are more stringent than that of
an NBFC. Moreover, a bank cannot operate any business other than the
banking business, but an NBFC can operate such business.