The current regulations are different for banks and NBFCs, on one hand NBFCs have the leverage of low entry capital (s20mn for NBFC and m3bn for a bank), lower SLR and CRR requirements, and no priority sector lending norm of 40% (of total advances) while on other hand keeping the risk in mind they are required to maintain a higher capital adequacy ratio. Moreover they are not allowed to accept demand deposits and are subject to exposure limits and above all, the deposits are not insured by the official deposit insurance scheme.
Due to the different regulatory treatments, which is given to banks and NBFCs. NBFCs have fallen into a trap of high costs lending and borrowing. NBFCs have to borrow directly from the market which is at much higher rate compared to banks because banks have an option of borrowing at a low cost through accepting deposits as current account and savings account. Naturally the lending rates also go up for NBFCs. Also the sources of funds for an NBFC are much more volatile compared to a bank as has been seen in late 2008 and 2009. Other advantages that the bank has are: much larger customer base and the confidence linked with the deposits; and the diversification benefits that can be used by having a much larger asset mix.