Finalyst November 2013 Issue November 2013 | Page 18

FINALYST

NOVEMBER 2013
Pranesh.R,

Banks & NBFCs

PGP-1, BIM-Trichy

Banking Licenses
Banking License
to NBFCs
to NBFCs
While inaugurating the five hun- keeping these NBFCs from applying ? While banks are incorporated undredth branch of Kotak Mahindra for a banking licence and what are

der banking companies act, NBFC is

Bank – previously a Non-Banking Fi- the advantages of doing so.

incorporated under company act of

nancial Company, RBI deputy gover-

1956

nor announced that NBFCs may get
priority over other applicants for securing banking licence. He stated
that existing customer base of NBFCs
makes it easier for them to convert
into banks. In this scenario, even
though almost every NBFC has lined
up for a Banking licence, leading

Before proceeding further, it is time

for some insight on the difference Advantages of NBFC over a Bank:
between a bank and a NBFC. There
exists a high degree of similarity
among the activities they perform;
however, there are a few differences.
NBFCs,
? Do not accept demand deposits.

For NBFCs pondering over a banking
licence, it is often a trade-off between the freedom of an NBFC and
the incentive of safety and low-cost
deposits associated with banks.
Most often, it is easier to manage an

NBFCs such as Mahindra Finance, ? Do not form part of the payment NBFC than a Bank. NBFCs do not
Sundaram Finance etc. have re-

and settlement system and cannot have to allocate a part of their capital

strained themselves from applying

issue cheques drawn on it.

for mandatory reserves such as cash

for a banking licence. The remaining ? Do not issue Demand Drafts like reserve ratio and statutory liquidity
ratio. Also, most of the customers in
of this article will focus on what is banks.

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