Banking and Non Banking Financial Institution’s Basic Differences

Posted by BankInfo on Mon, Dec 13 2010 05:00 pm

In Bangladesh now different commercial banks and the non banking financial organizations are operating there business. And every organization now involved attracting the retail customers that means the middle income group people of the country. To draw their attention the sells persons of different organization try to knock every possible door. These activities of different organization increase the interest about this sector. As both commercial banks and the non financial institutes are in the market, so it makes confusion to the general people about the activities of these organizations. This article helps the customers to makes differentiate between these.

Banks, usually a corporation, that accepts deposits, makes loans, pays checks, and performs related services for the public. The Bank Holding Company Act of 1956 defines a bank as any depository financial institution that accepts checking accounts (checks) or makes commercial loans, and its deposits are insured by a federal deposit insurance agency. A bank acts as a middleman between suppliers of funds and users of funds, substituting its own credit judgment for that of the ultimate suppliers of funds, collecting those funds from three sources: checking accounts, savings, and time deposits; short-term borrowings from other banks; and equity capital. A bank earns money by reinvesting these funds in longer-term assets. A Commercial Bank invests funds gathered from depositors and other sources principally in loans. An investment bank manages securities for clients and for its own trading account. In making loans, a bank assumes both interest rate risk and credit risk.

The commercial banks are described now a day by many agents of economic development and social change. Their functions and roll are undergoing revolutionary changes client coverage and extended beyond imagination.

While many people believe that banks play only narrow roll in the economy taking deposit and making loans the modern banks has bad to adopt new roles to remain competitive and responsive to public needs. Baking’s principal roles today are as follows:

The intermediary role:
Transforming saving received primarily from household into credit for business firm and others in order to make investment in new building, equipment and other goods.

The payment role:
Carrying out payment for goods and services on behalf of their customers.

The guarantor role:
Standing behind their customers to pay off customer debts, when those customers are unable to pay.

The risk management role:
Assisting customer in preparing financially for the risk of lost to property and persons.

The saving / investment advisers’ role:
Aiding customers in fulfilling their long rang goals for a better life by building, managing, and protecting savings.

The safekeeping/certification of value role:
Safeguarding a customer’s valuables and appraising and certifying their true market

The agency role:
Acting on behalf of customers to manage and protect their property or issue and redeem their securities.

The policy role:
Saving as a conduit for govt. policy in attempting to regulate the growth of the economy and pursue social goals.

Non-bank financial institutions represent one of the most important parts of a financial system. In Bangladesh, NBFIs are new in the financial system as compared to banking financial institutions (BFIs). A total of 25 NBFIs are now working in the country. The NBFIs sector in Bangladesh consisting primarily of the development financial institutions, leasing enterprises, investment companies, merchant bankers etc. The financing modes of the NBFIs are long term in nature. Traditionally, our banking financial institutions are involved in term lending activities, which are mostly unfamiliar products for them. Inefficiency of BFIs in long-term loan management has already leaded an enormous volume of outstanding loan in our country. At this backdrop, in order to ensure flow of term loans and to meet the credit gap, NBFIs have immense importance in the economy. In addition, non-bank financial sector is important to increase the mobilization of term savings and for the sake of providing support services to the capital market.

The basic difference may include:-

  • A Bank is an organization that accepts customer cash deposits and then provides financial services like bank accounts, loans, share trading account, mutual funds, etc.
  • A NBFC (Non Banking Financial Company) is an organization that does not accept customer cash deposits but provides all financial services except bank accounts.
  • A bank interacts directly with customers while an NBFI interacts with banks and governments
  • A bank indulges in a number of activities relating to finance with a range of customers, while an NBFI is mainly concerned with the term loan needs of large enterprises
  • A bank deals with both internal and international customers while an NBFI is mainly concerned with the finances of foreign companies
  • A bank's man interest is to help in business transactions and savings/investment activities while an NBFI's main interest is in the stabilization of the currency

Besides the differences between the both commercial banks and the non banking financial institutions they play both for the development of the economic structure of the country. If the both play positively than it can be said that, the development of the country is sure.

- Article Written By: Md. Mahfuzur Rahman, BankInfoBd


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