What Are NBFCs?

The Non-Banking Financial Company (NBFC) registered under the companies act is regulated and monitored by the Reserve Bank of India. The activities of the NBFC are related to providing loans and advances, lending, credit facility, trading in the money market, savings and investment products, transfer of money, managing portfolios of stocks and etc.

All the Non- Banking Financial Companies are engaged in leasing, hire purchase, venture capital finance, housing finance, infrastructure finance, etc. NBFCs can accept deposits but only are term deposits, not deposits that are repayable on demand.

There are 3 types of companies under the NBFCs which are as follows: –

There is a difference between the NBFCs and Banks since NBFCs cannot issue cheques drawn on themselves and cannot accept saving deposits in the same way that the banks can. Further, an NBFC is not a part of the payment and settlement system and it is also not required to maintain Reserve Rations (CRR, SLR, etc).

However, money deposited in an NBFC does not have any guarantee,, unlike banks. NBFCs perform and function at a smaller scale as compared to banks. Also, an NBFC cannot get indulged in industrial or agricultural activities or sale- purchase, or construction of the immovable property.

What Are Micro Finance Companies (MFI)?

Micro Finance Companies are smaller as compared to the NBFCs. The purpose and motive of Microfinance Companies are similar to the NBFC which is to serve the underprivileged and impoverished sections of society that do not have access to banking facilities.

The funds provided by the Micro Finance companies are small that may vary from Rs 1,000 to 20, 000 to the backward section of the people to help them to start a business.

However, MFIs charge a very high rate of interest from the people. Besides, Micro Finance Company mainly indulges in providing/ disbursement of loans in contravention to the directives issued to the MFI. Also, it gives credits to the newly formed groups within 15 days of the formation. In certain situations, it has also been noticed that there is no review of the functioning of Micro Finance Companies from the time the credit facility is sanctioned.

Therefore, the State Government has taken some critical steps to convert the Micro Finance Company into NBFC which is comparatively better regulated by the Reserve Bank of India (RBI).

Further, the Micro Finance Companies shall get the NBFC status and access to wide-scale funding from the banking institutions.

7 Key Differences Between MFI and NBFC

Both the Microfinance Companies and NBFCs play a very important role in providing finances in rural areas. NBFCs are required to work in accordance with the rules and regulations imposed by the authorities in terms of the acceptance of deposits and issuance of cheques or providing loans.

On the other hand, Micro Finance Companies offer small loans or credits to the backward section of society as compared to the NBFCs. The key differences between NBFC vs MFI are as follows:

Micro Finance Companies NBFCs
The Micro Finance Companies works towards providing loans to the backward section of the society that resided in the rural areas. NBFCs work towards providing loans in urban as well as in rural areas as they are available in PAN India.
The Micro Finance companies impose a higher rate of interest on the borrowers. The majority of NBFCs impose a rate of interest not higher than the ceiling rate directed or recommended by the Reserve Bank of India.
The Micro Finance Companies cannot maintain transparency in the long run. The NBFCs maintain transparency within the system and therefore they are more reliable.
The Micro Finance Companies work under many government restrictions and therefore they do not have the potential to act like traditional banks. NBFCs may be considered the relevant alternative to the traditional banks when it comes to the disbursement of credit, specifically in the event of urgency.
The Micro Finance Companies often do not follow the RBI compliances when it comes to the procedure of recovery of credit. They are often found violating the fair practice code issued by the governing authorities. NBFCs follow the code of conduct issued by the RBI. They follow and abide by the rules and the regulations and certainly offer services to the needy ones without any hindrance.
Low financial credits are offered by Micro Finance Companies due to the imposition of restrictions and lack of adequate funding. Disbursal of certainly big amount of loans to individuals as well as corporations can be made under NBFCs, depending upon the necessities.
Micro Finance Companies have little access to the audience at large. NBFCs operate at a wider scope as compared to Micro Finance Companies.

Conclusion:

The function of Microfinance Companies and NBFCs is to provide financial credits to the backward sections of society. The Micro Finance Companies are the smaller version of the NBFCS.

The NBFCs serve to a wider audience whereas the Micro Finance Companies do not operate at a much wider scope. Even though the purpose of both entities is similar, there are differences between Microfinance Companies and NBFCs that are quite clearly discussed above.