BANK vs FI

Financial Institution (FI): “A financial institution (FI) is an establishment that focuses on dealing with
financial transactions, such as investments, loans and deposits. Conventionally, financial institutions are
composed of organizations such as banks, trust companies, insurance companies and investment dealers.
Almost everyone has deal with a financial institution on a regular basis. Everything from depositing money to
taking out loans and exchange currencies must be done through financial institutions.” (Investopedia)

Features of FIs:
1. Financial Institution: There are several types of financial institutions:
 Banks (Retail & Wholesale)
 Non-Banking Financial Institutions(NBFIs)
 Insurance Companies
 Pension Funds
 Others:
i. Mutual Funds
ii. Hedge Funds
iii. Micro-finance institutions (A type of NBFI with a clear distinction)
iv. Co-operative societies
v. Financial service providers like Stock exchanges, stockbrokers, depositories.
2. Financial Institutions (FIs) perform the essential function of channeling funds from those with
surplus funds (supply of funds) to those with shortages of funds (users of fund).
3. There are two types of FIs:
i. Depository FIs (banks, savings institutions, & credit unions)
ii. Non-depository FIs (Insurance companies, security firms, investment banks, finance
companies and mutual fund

Bank: “A bank is a financial institution licensed as a receiver of deposits. There are two types of banks:
commercial/retail banks and investment banks. In most countries, banks are regulated by the national
government or central bank.” (Investopedia) The name bank derives from the Italian word banco
"desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above
a desk covered by a green tablecloth. However, traces of banking activity can be found even in ancient times.

The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ.
The word 'bank' was probably derived from the word 'bench' as during ancient time Jews used to do money -
lending business sitting on long benches. The oldest bank still in existence is “Banca Monte dei Paschi di
Siena”, headquartered in Siena, Italy, which has been operating continuously since 1472. In the South Asian
region, early banking system was introduced by the Afghan traders popularly known as Kabuliwallas. Muslim
businessmen from Kabul, Afghanistan came to India and started money lending business in exchange of
interest sometime in 1312 A.D. They were known as 'Kabuliwallas'.

Features of Banks:
1. Banks perform a specific function of:
 Accepting Deposits: of individuals, non-individuals (partnerships, companies, trusts
etc.). They pay an interest on deposits.
  Lending: They give loans and other credit facilities to individuals & non-individuals for
their business/personal requirements.
2. There are generaly two types of banks:
i. Commercial/Retail Banks
ii. Investment Banks.
3. Current global bank capital requirements are referred to as Basel II.
4. Bank's main earning is interest. Bank gives lower interest on deposit and gets higher interest on
loan. With this difference, bank makes money.
5. Generally, a bank comprises of three departments- General Banking, Credit Department, and
Foreign Exchange Department. The department that is most important to a bank and to the
interest of the country is Foreign Exchange Department.
6. Banking companies act 1991 remain operative to control and monitor the function of banks in
coordination with the other laws.
7. The prime objective of the banking industry as a whole is to collect deposits from the public and
to invest the same in the form of loans and advances to businesses.
8. The service necessary for financing of import, export, guarantees etc. is also the function of banks.
9. Bank can be termed as iron cell of blood in a financial system of a country. Without bank a
financial system can’t survive.
10. Bank is a financial institution that serves as a financial intermediary.

Difference between Banks and Non-Banking Financial Institutions (NBFIs)

Banks NBFIs
A Bank is one of many types of Financial A type of Financial Institution would include
Institutions. Banks.

Banks are the government authorized financial NBFIs provides banking services to people without
intermediary that aims at providing banking carrying a bank license
services to the general people
Bank is registered under the Bank Company Act, NBFI is incorporated under Financial Institution
1991 Act, 1993
Banks accept demand deposits NBFIs are not allowed to accept deposits which are
repayable on demand
In the case of private sector banks they are eligible In NBFI, foreign Investments up to 100% is
for foreign investment, but which would be no allowed.
more than 74%.
Banks are an integral part of the payment and NBFI is not a part of this system
settlement cycle
It is mandatory for banks to maintain reserve ratios In the case of NBFI it is not required to maintain
like CRR or SLR reserve ratios.

Banks can create credit NBFIs are not involved in the creation of credit
Banks can provide transaction services to its These type of services cannot be provided by
customers such as providing overdraft facility, issue NBFIs
of traveller’s cheques, transfer of funds, etc.