Differences between Microfinance Companies and NBFCs

Differences between Microfinance Companies and NBFCs
Japsanjam Kaur Wadhera
| Updated: Mar 04, 2021 | Category: Microfinance Company, NBFC, RBI Advisory

The term NBFC refers to Non- Banking Financial Company that is registered under the Companies Act, 2013 and is regulated by the Reserve Bank of India. On the other hand, MFI is the term used for Micro Finance Company which is at a smaller level in comparison to the NBFC. In India, NBFCs and MFIs operate in the rural parts of the country so as to meet the banking requirements of the people. Both the Microfinance Companies and NBFCs serve and provide banking facilities. However, there are differences between both the entities. This article will discuss about the differences between Microfinance Companies and NBFCs in India.

Understanding 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 is related to providing loans and advances, lending, credit facility, trading at 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 and etc. NBFCs can accept deposits but only which are term deposits and not deposits which are repayable on demand.

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

  • Asset Companies.
  • Investment Companies.
  • Loan Companies.

There is a difference between the NBFCs and Banks since, NBFCs cannot issue cheques drawn on itself and cannot accept saving deposits in the similar way that the banks can do. 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 and etc).

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

Also, Read: What are the Major Risks Faced by Micro Finance Company in India?

Understanding Micro Finance Companies

Micro Financer Companies are smaller as compared to the NBFCs. The purpose and motive of Micro finance Companies are similar to the NBFC that is to serve to the underprivileged and impoverished sections of the society that do not have access to the 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. Beside, Micro Finance Company is mainly indulged in providing/ disbursement of loans in contravention to the directives issued to the MFI. Also, it issues credits to the newly formed groups within the 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 important steps to convert the Micro Finance Company into NBFC which are comparatively better regulated by the Reserve Bank of India (RBI). Further, the Micro Finance Companies shall get the NBFC status and get the access to the wide scale funding from the banking institutions.

Understanding the differences between Microfinance Companies and NBFCs

Both the Microfinance Companies and NBFCs play a very important role of providing finances in the rural areas. NBFCs are required to work in accordance to the rules and regulations imposed by the authorities in terms of the acceptance of deposit and issuance of cheque or providing loans. On the other hand, the Micro Finance Companies offer small loans or credits to the backward section of the society as compared to the NBFCs. The key differences between Microfinance Companies and NBFCs are as follow:

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 works towards providing loans in urban as well as in rural areas as they are available PAN India.
The Micro Finance companies imposes higher rate of interests on the borrowers. The majority of NBFCs imposes rate of interest not higher than the ceiling rate directed or recommended by the Reserve Bank of India.
The Micro Finance Companies fail to maintain transparency in the long run. The NBFCs maintain the 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 potential to act like traditional banks. NBFCs may be considered as 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 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 the restrictions and lack of adequate funding. Disbursal of certainly big amount of loans to the individuals as well as corporate can be made under NBFCs, depending upon the necessities.
Micro Finance Companies have little access to 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 the society. The Micro Finance Companies are the smaller version of the NBFCS. The NBFCs serves to a wider audience where as the Micro Finance Companies do not operates at a much wider scope. Even though the purpose of both the entities is similar, yet there are differences between Microfinance Companies and NBFCs that are quite clearly discussed above in the article.

Also, Read: A Complete Guide on NBFC Funding In India

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Japsanjam Kaur Wadhera

Japsanjam Kaur Wadhera is an Advocate and has completed her BA.LLB (Hons) and has experience of writing various research papers during her college time. Earlier she was working as an Associate Advocate in a reputed Law Firm. She has an extreme interest in writing legal content and her core area falls under legal enactments, tax and finance.

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