NBFC vs Bank vs Payment Bank: Key Differences Every Exam Aspirant Must Know

The difference between NBFC bank and payment bank is one of the most repeated Banking Awareness topics in IBPS, SBI, RBI Grade B and SSC exams. In short: banks accept demand deposits and lend; NBFCs lend but cannot accept demand deposits; payment banks accept small savings deposits (up to Rs 2 lakh per customer) but cannot lend. This one-pager gives you the full comparison, deposit rules, licensing, DICGC coverage and previous year questions.

Quick Answer: NBFC vs Bank vs Payment Bank in One Table

Use this comparison table as your quick revision anchor before any banking exam:

What Is a Bank? Definition and Legal Basis

Under Section 5(b) of the Banking Regulation Act, 1949, “banking” means accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Two features define a bank:

• Accepting demand deposits (current and savings accounts withdrawable on demand)
• Lending or investing those deposits for profit

Only a banking company licensed under Section 22 of the Banking Regulation Act can use the word “bank” in its name and operate as part of the payment and settlement system — issuing cheques, clearing, and participating in RTGS/NEFT. Refer to the official text at rbi.org.in and legislation at indiacode.nic.in.

What Is an NBFC? Meaning and Registration

A Non-Banking Financial Company (NBFC) is defined under Section 45-I(f) of the RBI Act, 1934 as a company engaged in financial activity as its principal business — receiving deposits, lending, hire purchase, leasing, insurance, chit funds, or investments in securities.

Why can an NBFC accept deposits but not demand deposits? Because of the 50-50 principal business test: a company whose financial assets constitute more than 50 per cent of total assets and financial income is more than 50 per cent of gross income is treated as an NBFC. NBFCs may accept public deposits (time deposits, with RBI-imposed limits and ratings) but never demand deposits, since they are not part of the payment and settlement system and cannot issue cheques. Every NBFC must obtain a Certificate of Registration (COR) from the RBI and maintain the prescribed Net Owned Fund.

What Is a Payment Bank? Origin and Purpose

Payment banks were recommended by the Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households (2013). The RBI issued guidelines in 2014 and granted the first differentiated licences in 2015, with 11 in-principle approvals. Their purpose is financial inclusion — small savings accounts, remittances and low-cost payments for migrant workers and small businesses.

Examples include India Post Payments Bank (IPPB), Airtel Payments Bank and Paytm Payments Bank (whose banking operations were restricted by RBI in 2024). Read the guidelines at RBI — Licencing of Small Finance Banks & Payments Banks.

Licensing: How Each Institution Is Authorised

• Universal bank: Full banking licence under Section 22, Banking Regulation Act; minimum capital of Rs 500 crore under the 2016 guidelines for on-tap licensing.
• NBFC: Registration (COR) under Chapter IIIB of the RBI Act, 1934 — registration, not a banking licence.
• Payment bank: Differentiated banking licence under RBI’s 2014 guidelines; minimum paid-up equity capital of Rs 100 crore; promoters must hold at least 40 per cent initially, locked in for five years.

Deposit Rules: Demand Deposits, Savings and Fixed Deposits

• Banks: Accept demand deposits (current + savings) and time deposits (FDs, RDs) without any per-customer cap.
• NBFCs: Can accept only time deposits (public deposits) with minimum 12-month tenure, subject to eligibility, credit rating and limits — never demand deposits or savings accounts.
• Payment banks: Can accept savings and current deposits, but the balance per individual customer is capped at Rs 2 lakh (raised from Rs 1 lakh by RBI in April 2021). They can also distribute simple financial products like mutual funds and insurance.

What Each Institution Can and Cannot Do

Can a payment bank lend money or issue credit cards? No. Payment banks must deploy deposits in government securities and scheduled commercial bank deposits (minimum 75 per cent of demand deposit balances), and they cannot issue credit cards or undertake lending.

RBI Regulation and Deposit Insurance (DICGC)

Are deposits with NBFCs insured under DICGC? No. The DICGC (Deposit Insurance and Credit Guarantee Corporation, a wholly owned RBI subsidiary) insures deposits of banks — commercial banks including payment banks and small finance banks, RRBs, co-operative banks — up to Rs 5 lakh per depositor per bank (raised from Rs 1 lakh in the 2020 Budget). NBFC deposits are unsecured and not covered — a classic exam point. Verify current coverage at dicgc.org.in.

Capital Requirements and Promoter Norms

• Payment banks: Minimum paid-up capital of Rs 100 crore; promoter stake at least 40 per cent for first five years; voting rights capped at 10 per cent for non-promoters, with aggregate foreign shareholding up to 74 per cent.
• Universal banks: Minimum Rs 500 crore entry capital; promoter shareholding capped at 15 per cent (for non-financial promoters) after 15 years; voting rights capped at 10 per cent (26 per cent for payments banks’ promoters, aligned to shareholding).
• NBFCs: Under scale-based regulation (effective October 2022), base-layer NBFCs need Rs 10 crore Net Owned Fund; upper-layer and deposit-taking NBFCs face higher norms.

CAMELS and Supervision: How RBI Monitors Each Type

Banks are supervised under the CAMELS framework — Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Systems and controls — through on-site inspections under Section 35 of the Banking Regulation Act. NBFCs are inspected under Section 45N of the RBI Act and graded under scale-based regulation (base, middle, upper, top layers). Payment banks, being licensed banks, fall under CAMELS-based supervision too, but with simplified return requirements given their narrow functions. Audit and prudential return norms differ across the three, which is why supervision questions appear frequently in RBI Grade B and SEBI Grade A papers.

Small Finance Banks: The Fourth Category Often Confused

Like payment banks, Small Finance Banks (SFBs) were created on the Nachiket Mor Committee’s recommendations and licensed from 2015 onwards. The key distinction: SFBs are full-service banks — they can accept demand deposits and lend (at least 50 per cent of loans up to Rs 25 lakh), with 75 per cent of branches in unbanked rural areas. Examiners often pair “payment bank vs small finance bank” — remember: payments take deposits but don’t lend; SFBs do both.

Previous Year Exam Questions and Memory Tricks

Sample questions modelled on IBPS PO, SSC CGL and RBI Assistant patterns:

1. Q. Payment banks can accept a maximum deposit of ___ per individual customer. Ans: Rs 2 lakh (IBPS-style, 2021 onwards).
2. Q. Under which section of the RBI Act, 1934 is an NBFC defined? Ans: Section 45-I(f) (RBI Assistant pattern).
3. Q. Which committee recommended payment banks? Ans: Nachiket Mor Committee, 2013.
4. Q. Which of the following cannot accept demand deposits? Ans: NBFC (SSC CGL pattern).
5. Q. DICGC insures bank deposits up to — Ans: Rs 5 lakh per depositor per bank.
6. Q. Minimum capital for a payment bank is — Ans: Rs 100 crore.

Mnemonic table for last-minute revision:

Frequently Asked Questions

Q: What is the main difference between a bank and an NBFC?

Only banks can accept demand deposits and are part of the payment and settlement system; banks are licensed under the Banking Regulation Act, 1949. NBFCs are registered under Section 45-I of the RBI Act, 1934 and cannot offer cheque facilities or accept demand deposits, though they can lend and take time deposits.

Q: Can payment banks issue loans?

No. Payment banks cannot lend or issue credit cards. They must park deposits in government securities and bank deposits (minimum 75 per cent of demand deposit balances) as per RBI norms, and may only earn fee income from payments and distribution of simple products.

Q: What is the deposit limit in a payment bank account?

Initially Rs 1 lakh per individual customer; the RBI raised it to Rs 2 lakh in April 2021. Amounts at the end of day above this cannot be held in a payment bank savings account.

Q: Are NBFC deposits insured?

No. DICGC insurance (up to Rs 5 lakh per depositor per bank) applies only to banking companies, including payment banks and small finance banks. NBFC deposits are unsecured — a frequently asked exam point.

Q: Which committee suggested payment banks?

The Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households (2013), whose recommendations led to RBI’s 2014 guidelines and the first payment bank licences in 2015.

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