Non-bank financial institution : meaning, role, difference between NBFI and banks

Non-bank financial institution

A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples of these include insurance firms,pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and micro loan organizations. Alan Greenspan has identified the role of NBFIs in strengthening an economy, as they provide "multiple alternatives to transform an economy's savings into capital investment [which] act as backup facilities should the primary form of intermediation fail."

Role in Financial System 

NBFIs supplement banks by providing the infrastructure to allocate surplus resources to individuals and companies with deficits. Additionally, NBFIs also introduces competition in the provision of financial services. While banks may offer a set of financial services as a packaged deal, NBFIs unbundle and tailor these service to meet the needs of specific clients. Additionally, individual NBFIs may specialize in one particular sector and develop an informational advantage. Through the process of unbundling, targeting, and specializing, NBFIs enhances competition within the financial services industry.

Growth 

Some research suggests a high correlation between a financial development and economic growth. Generally, a market-based financial system has better-developed NBFIs than a bank-based system, which is conducive for economic growth.

Stability 

A multi-faceted financial system that includes non-bank financial institutions can protect economies from financial shocks and enable speedy recovery when these shocks happen. NBFIs provide “multiple alternatives to transform an economy's savings into capital investment, [which] serve as backup facilities should the primary form of intermediation fail". However, in the absence of effective financial regulations, non-bank financial institutions can actually exacerbate the fragility of the financial system.

Difference between bank and non-banking financial institution

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) A bank interacts directly with customers ; while an NBFI interacts with banks and governments

(b) 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

(c) A bank deals with both internal and international customers; while an NBFI is mainly concerned with the finances of foreign companies

(d) 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