Fixed deposit (or FD) is a great savings tool for individuals looking for safety of their deposit and attractive returns to meet their goals. However, choosing between an NBFC and a bank FD can be challenging, especially as there are several factors to consider.
Before delving into these factors, it is important to understand the differences between banks and NBFCs.
How are NBFCs different from banks?
Banks are government-authorised financial institutions that offer banking activities such as managing withdrawals, paying interest, accepting deposits, granting credit and clearing cheques. As financial agents between borrowers and deposits, banks ensure smooth functioning of the economy.
When choosing to save with bank fixed deposits, you can choose public-sector, private-sector or foreign banks that accept deposits.
On the other hand, an NBFC (or Non-banking Financial Company) is a registered company regulated by the Reserve Bank of India under the RBI Act of 1934. NBFCs also offer loans and advances, savings, transfer of money, credit facility, investment products, trading in the money market and managing portfolios of stocks. However, NBFC Registration is mandatory for conducting these activities.
If you’re looking to grow your savings with an NBFC fixed deposit, choose a registered NBFC that accepts deposits.Here’s a quick comparison table to help you differentiate between banks and NBFCs:
|Basis of Comparison||NBFCs||Banks|
|Foreign Investment||Allowed up to 100%||Allowed up to 74% for Private Sector Bank|
|Regulated under||Companies Act of 2013||Banking Regulation Act of 1949|
|Demand Deposit||Is not Accepted||Is Accepted|
|Maintenance of Reserve Ratios||Not Required||Mandatory|
|Payment and Settlement system||Is not a part of the System||Essential part of the System|
|Credit Creation||Does not create Credit||Creates Credit|
|Deposit Insurance Facility||Not Available||Available|
|Transaction Services||Cannot be provided by NBFC||Provided by Bank|
Differences between NBFC and bank FDs
When planning whether to invest in NBFC or bank FDs, it is important to understand the differences between the two. Here’s a look at the key differences:
● NBFCs are not allowed to accept repayable on demand deposits whereas banks can accept demand deposits.
● Deposit insurance facility is available to the depositors by DIGC (Deposit Insurance and Credit Guarantee Corporation). In the case of NBFC, this option is not available.NBFCs cannot provide transaction services to its customers such as issue of traveller’s cheque, providing overdraft facility, transfer of funds, etc. On the other hand, these types of services are provided by banks.
When looking to grow your savings with a fixed deposit, it is important to select the right financier. If you’re looking to make the right choice, here’s a comprehensive look at NBFC FD Vs Bank FD to help you decide:
● Interest rate offered
In general, Non-banking Financial Companies (NBFCs) offer interest rates that are higher than bank fixed deposit interest rate. This is due to “credit risk” that is associated with NBFCs. A bank’s fixed deposit interest rates typically tend to be lower than that of an NBFC.
● Risk associated
Bank FDs are considered safer, especially with 2020’s Budget announcement of an enhanced insurance cover of Rs.5 lakh. NBFCs FDs, on the other hand, do not offer any such cover. However, credit rating agencies such as CRISIL and ICRA award safety ratings to different NBFCs, based on their reputation and credentials. NBFC fixed deposits with ratings of AAA from CRISIL and ICRA are considered as the safest deposits. To avoid instances of losing your interest payments or principal, it is best to select NBFCs with a strong reputation and high safety ratings, when saving with fixed deposits.
● Tax benefits
While NBFC FDs offer a higher rate of interest, the tax benefits you gain from bank FDs are higher. Under Income Tax Act (ITA) Section 80C, you can claim tax deductions of up to Rs.1.5 lakh in a year on your 5-year bank deposits. However, if you make any premature withdrawals during the lock-in period, you will not get any tax benefits.
When choosing between bank and NBFC FDs, you may consider the convenience of saving and additional features that you stand to gain. Several NBFCs offer an end-to-end online depositing experience, which enables you to grow your savings easily. You can also benefit from loan against FD facility or renewal rate benefits, which help you grow your savings easily.
When planning your savings, it is important to consider your own goals. Whether you are taking up a bank FD or NBFCs, make sure you research thoroughly and choose a plan that meets your requirements. If you are taking a FD from NBFC and not a bank FD, make sure it is from a reputable company.Moneycontrol journalists were not involved in the creation of the article