What is the difference between NBFC and Small Finance Bank?

Non-banking financial institutions (NBFCs) and small finance banks (SFBs) are an important source of the Indian financial system. The Non-banking financial institutions and Small Finance banks both offer financial services, there is a stark contrast between their structure, functions, and regulatory environment. In this article, we are giving in-depth explanations of NBFCs and SFBs to give you an understanding of their roles and operational variations.

What is an NBFC?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956, or the Companies Act, 2013, which carries on financial business like lending, investments, leasing, hire-purchase, insurance, or chit funds. They are governed by the Reserve Bank of India (RBI) as per the RBI Act, 1934.

What is a Small Finance Bank?

A Small Finance Bank (SFB) is a specialised bank licensed by the RBI to offer basic banking services with emphasis on financial inclusion for unbanked and underserved sections. SFBs were launched in 2015 to fill the gap in rural and semi-urban regions with deposit and lending services. SFBs are governed by the Banking Regulation Act, 1949, and are subject to more stringent regulations compared to NBFCs.

Key Differences Between NBFC and Small Finance Bank

Parameter	NBFC	Small Finance Bank
Definition	Non-banking entity providing financial services without a banking license.	Licensed bank focusing on financial inclusion with basic banking services.
Regulation	Regulated by the RBI under the RBI Act, 1934; less stringent norms.	Regulated by the RBI under the Banking Regulation Act, 194, stricter norms.
Banking License	No banking license; cannot accept demand deposits.	Holds a banking license; can accept demand and time deposits.
Services	Loans, leasing, hire-purchase, investments and microfinance.	Savings/current accounts, loans, fixed deposits, basic banking.
Deposits	Can accept fixed deposits (if permitted); no demand deposits.	Accepts both demand (savings/current) and time deposits.
CRR/SLR Compliance	Not required to maintain CRR or SLR.	Must maintain CRR (4%) and SLR (18%) as per RBI norms.
Target Audience	Small businesses, retail customers, niche markets.	Unbanked, underbanked, low-income groups and small enterprises.
Capital Requirements	Lower capital requirements (minimum ₹2 crore for some NBFCs).	Higher capital requirements (minimum ₹200 crore).
Payment Systems	Cannot issue chequebooks or participate in payment systems.	Can issue chequebooks and participate in payment systems like NEFT/RTGS.
Priority Sector Lending	Not mandatory, though some NBFCs voluntarily lend to priority sectors.	Mandatory 75% of Adjusted Net Bank Credit to priority sectors.

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