Ask any first-time borrower in India whether their loan came from a “bank” or a “finance company,” and you’ll often get a shrug. Both hand over money, both charge interest, both send EMI reminders. Yet legally and operationally, a bank and a Non-Banking Financial Company (NBFC) are built on very different foundations. Understanding where that line falls isn’t just exam trivia – it explains why your salary account has to be with a bank, why an NBFC fixed deposit carries more risk than a bank FD, and why some lenders can issue you a chequebook while others can’t.
Table of Contents
- Banks and NBFCs: similar work, different rulebooks
- The five differences that actually separate them
- 1. Only banks can accept demand deposits
- 2. NBFCs sit outside the payment and settlement system
- 3. Cheque-issuing stays a bank-only privilege
- 4. DICGC insurance protects bank deposits, not NBFC deposits
- 5. Clearing house membership stays with banks
- A quick side-by-side view
- Why NBFCs still matter despite these limits
- What do you think?
Banks and NBFCs: similar work, different rulebooks
A bank in India is licensed and regulated under the Banking Regulation Act, 1949, with the Reserve Bank of India (RBI) overseeing everything from capital adequacy to daily operations. Banks are built to be the backbone of the payments and credit system – they take your salary, hold your savings, lend to businesses, and move money across the country in seconds.
An NBFC is a company registered under the Companies Act that carries on financial activities – lending, investment, leasing, hire-purchase – as its principal business. Instead of the Banking Regulation Act, NBFCs are governed by the RBI Act, 1934, and specifically by Section 45-IA, which requires them to obtain a Certificate of Registration and maintain a minimum Net Owned Fund before they can commence business. On paper, both types of entities lend and invest. In practice, the RBI itself lists a specific, narrow set of powers that only banks get – and that’s where the real distinction lies.
The five differences that actually separate them
1. Only banks can accept demand deposits
This is the single biggest dividing line. A demand deposit is money you can withdraw whenever you want – your savings account or current account balance. Banks are built around this facility; it’s how they fund a large share of their lending. NBFCs are explicitly barred from it. According to the RBI’s own FAQ on the subject, NBFCs cannot accept demand deposits, full stop – this is listed as the first major difference between the two types of institutions.
Even the small number of NBFCs that RBI has specifically licensed to raise money from the public can only do so through term deposits – fixed and recurring deposits with a minimum tenure of twelve months and a maximum of sixty, and never repayable on demand. The RBI has also not issued any fresh licence for public deposit acceptance to new NBFCs since 1997, as a matter of policy, which is why most NBFCs today fund themselves through market borrowings, bank loans, and bonds rather than public deposits at all.
2. NBFCs sit outside the payment and settlement system
Every time you use NEFT, RTGS, IMPS, or UPI, you’re relying on India’s payment and settlement infrastructure, governed by the Payment and Settlement Systems Act, 2007. This framework treats banks as core “system participants,” giving them direct access to clearing and settlement networks operated by the National Payments Corporation of India (NPCI) and the RBI. NBFCs are not part of this system. The RBI’s FAQ page states plainly that NBFCs do not form part of the payment and settlement system, which means an NBFC cannot directly move money the way a bank does – it has to route transactions through a partner bank instead.
This has grown more visible in recent years as the RBI has modernised the settlement infrastructure itself; for instance, the cheque clearing system moved from next-day batch processing to same-day continuous clearing in October 2025, a shift managed entirely between banks and NPCI, with no equivalent role for NBFCs.
3. Cheque-issuing stays a bank-only privilege
Following directly from the point above, banks can issue chequebooks drawn on themselves, letting account holders make payments by cheque. NBFCs cannot. As the RBI puts it, NBFCs “cannot issue cheques drawn on itself”. Interestingly, many NBFCs do collect post-dated cheques from borrowers as security for EMI repayments – but that’s a cheque drawn on the borrower’s own bank account, not one issued by the NBFC itself. The distinction can trip up students: an NBFC handling cheques as an instrument of repayment is completely different from an NBFC having the authority to issue its own cheque facility.
4. DICGC insurance protects bank deposits, not NBFC deposits
If a bank fails, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the RBI, steps in and repays each depositor up to ₹5,00,000 per depositor per bank, covering principal and interest together. This cover extends to commercial banks, cooperative banks, and local area banks. It does not extend to NBFCs. The RBI is explicit on this point too: deposit insurance facility of the DICGC is not available to depositors of deposit-taking NBFCs. So even the limited category of NBFCs that are allowed to accept public deposits offer no insurance-backed safety net if the company runs into trouble – depositors carry that credit risk themselves, which is one reason NBFC fixed deposits usually offer a slightly higher interest rate than bank FDs, as compensation for the extra risk.
5. Clearing house membership stays with banks
Clearing houses are the mechanism through which cheques, NEFT transfers, and interbank obligations are matched and settled between institutions every day. Because this infrastructure operates under the payment and settlement system, and NBFCs are excluded from that system, they are also excluded from direct membership in clearing houses. Every interbank settlement an NBFC’s transaction eventually touches has to pass through a bank that is a clearing house member – the NBFC itself has no seat at that table.
A quick side-by-side view
| Parameter | Bank | NBFC |
|---|---|---|
| Governing law | Banking Regulation Act, 1949 | RBI Act, 1934 |
| Demand deposits | Permitted (savings/current accounts) | Not permitted |
| Payment and settlement system | Direct participant | Excluded |
| Cheque issuance (drawn on itself) | Yes | No |
| DICGC deposit insurance | Available, up to ₹5 lakh | Not available |
| Clearing house membership | Direct member | Not a member |
| Credit creation | Can create credit through lending deposits | Cannot create credit in this manner |
Why NBFCs still matter despite these limits
None of this makes NBFCs a lesser choice – it just makes them a different one. Because they operate under a lighter compliance load than banks, NBFCs can move faster on loan approvals and are often willing to serve borrowers that banks find harder to underwrite: self-employed individuals, small business owners, and people financing vehicles, gold, or equipment. This flexibility is precisely why NBFCs have become a major channel for financial inclusion in India, extending credit into segments that traditional banking has historically found difficult to reach. The trade-off is that this flexibility comes with fewer of the depositor protections and payment-system privileges that make banks the default choice for holding your everyday money.
What do you think?
What do you think? If you were choosing where to park a fixed deposit, would the slightly higher interest rate an NBFC offers be worth giving up DICGC protection? And from an accounting standpoint, how do you think the absence of credit-creation and demand-deposit powers changes the way an NBFC’s balance sheet is structured compared to a bank’s?
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