NBFCs — Set 1

Correct Answer: C. Non-Banking Financial Company

• **Non-Banking Financial Company** = a financial institution registered under the Companies Act 2013 (or 1956) whose principal business is lending, investing in securities, or receiving deposits — but it does NOT hold a banking licence. • **RBI Act Section 45-IA** — NBFCs must obtain a Certificate of Registration from RBI under this section; without it, conducting NBFC business is illegal. • The 'Non-Banking' label means they perform bank-like functions (loans, investments) but are barred from accepting demand deposits and cannot be part of the payment system. • 💡 'Net Banking and Fiscal Center' is a made-up phrase with no regulatory meaning; 'New Business Finance Company' is fictional; 'National Banking and Finance Corporation' does not exist — all three options invent words not in the actual full form.

Correct Answer: A. Companies Act, 1956/2013

• **Companies Act, 1956/2013** = NBFCs must first be incorporated as a company under the Companies Act; this gives them their legal identity as a corporate entity before they can apply to RBI for registration. • **RBI Act 1934, Section 45-IA** — after incorporation under the Companies Act, the company must separately register with RBI under this section to actually carry on NBFC business; both registrations are required. • The Banking Regulation Act 1949 governs scheduled commercial banks, not NBFCs; SEBI Act 1992 governs capital market intermediaries; RBI Act 1934 provides the regulatory framework for NBFCs but is not the incorporation statute. • 💡 SEBI Act is wrong — it covers stock exchanges, brokers, mutual funds, not NBFCs; Banking Regulation Act is wrong — it applies to banks that take demand deposits, which NBFCs cannot; RBI Act is wrong as an answer here because NBFCs are incorporated under Companies Act, not registered under RBI Act (they are regulated by it, not formed under it).

Correct Answer: B. NBFCs cannot accept demand deposits.

• **NBFCs cannot accept demand deposits** = demand deposits (savings accounts, current accounts) are repayable on demand at any time; NBFCs are legally barred from accepting them; this is the single clearest statutory distinction. • **Fixed deposits allowed for 12–60 months** — NBFC-D (deposit-taking NBFCs) may accept fixed deposits only within this window; they cannot offer any instrument repayable on demand like a savings or current account. • NBFCs can lend, invest, and do hire-purchase just like banks in many respects; the prohibition is specifically on demand deposits and payment-system participation. • 💡 Option A is wrong — NBFCs are also registered under the Companies Act, just like banks can be; Option C is the opposite of truth — NBFCs are NOT part of the payment and settlement system; Option D is entirely false — lending is the core activity NBFCs are allowed to do.

Correct Answer: B. No, they cannot issue cheques drawn on themselves.

• **NBFCs are excluded from India's Payment and Settlement System** = they cannot issue cheques drawn on themselves, meaning customers cannot use an NBFC account to write cheques the way they do with a bank account. • **Payment and Settlement Systems Act 2007** — this Act governs participation in India's payment system; only RBI-authorised entities (banks, certain payment intermediaries) may be system participants; NBFCs are not included. • This exclusion is a key reason why NBFC depositors face higher risk — there is no current-account-style liquidity or DICGC insurance protection. • 💡 Option A and D (emergency/high turnover exceptions) are completely fictional — no such provision exists in law; Option C is false — NBFCs cannot issue cheques on themselves; only banks that maintain current accounts with RBI can do so.

Correct Answer: D. Deposit Insurance facility

• **Deposit Insurance (DICGC) is NOT available to NBFC depositors** = DICGC (Deposit Insurance and Credit Guarantee Corporation) insures bank deposits up to ₹5 lakh per depositor per bank; this protection does not extend to NBFCs. • **₹5 lakh DICGC cover (since 2020)** — even if a bank fails, each depositor recovers up to ₹5 lakh; NBFC depositors have no such statutory safety net and bear the full credit risk of the NBFC. • NBFC-D depositors do get nomination facility, fixed deposit receipts, and interest — all three are available; insurance is the one missing piece. • 💡 Nomination facility is wrong as an answer — NBFCs do allow nominees; Fixed deposit receipt is wrong — NBFCs issue FD receipts just like banks; Interest on deposits is wrong — NBFC-D deposits earn interest (subject to RBI ceiling); only DICGC insurance is absent.

Correct Answer: B. Rs. 2 Crore

• **₹2 crore minimum NOF** = this was the long-standing requirement for a new NBFC to obtain its Certificate of Registration from RBI; most exam questions still use this benchmark figure. • **Revised to ₹10 crore in 2022 (Scale-Based Regulation)** — RBI's SBR framework raised the minimum NOF to ₹10 crore for new NBFC registrations; however, the ₹2 crore figure remains the standard answer in most exam syllabi unless the question specifies 'post-2022' or 'revised'. • Net Owned Fund = paid-up equity capital + free reserves − accumulated losses − investments in subsidiaries/group companies; it measures the true owner's equity. • 💡 ₹10 crore is the revised 2022 figure but may not match what exam papers expect when asking 'standard general rules'; ₹50 lakh and ₹25 lakh are below any NBFC threshold and are fictitious distractors.

Correct Answer: A. Industrial activity

• **Industrial activity is prohibited** = an entity whose principal business is agricultural or industrial activity (manufacturing, processing) is explicitly excluded from the NBFC definition; if more than 50% of assets/income is from industry, RBI will not register it as an NBFC. • **50-50 test** — to qualify as an NBFC, financial assets must exceed 50% of total assets AND income from financial assets must exceed 50% of gross income; industrial activity would fail this test. • Providing home loans (NBFC-HFC), leasing assets (Asset Finance Company), and investing in shares (Investment Company) are all permitted NBFC activities — they are core financial functions. • 💡 Home loans are wrong — NBFCs like HDFC (before its bank merger) and LIC Housing Finance provide home loans legally; leasing is wrong — asset leasing is an approved NBFC category; investment in shares is wrong — Investment Companies (NBFC-IC) do exactly this.

Correct Answer: A. Investment Company

• **Investment Company** = an NBFC whose principal business is the acquisition of securities (shares, stocks, bonds, debentures, government securities); at least 50% of its total assets must be in securities. • **Merged into NBFC-ICC** — RBI's 2022 Scale-Based Regulation merged Investment Companies, Loan Companies, and Asset Finance Companies into a single category called NBFC-ICC (Investment and Credit Company); however, Investment Company remains the classical answer for 'acquiring securities'. • Investment Companies deploy capital into markets by buying financial instruments; they earn returns through dividends, interest, and capital appreciation — not through retail lending. • 💡 Asset Finance Company is wrong — it finances physical/productive assets like machinery, vehicles, equipment; Infrastructure Finance Company is wrong — it funds infrastructure projects (roads, power, telecom); Loan Company is wrong — its principal business is making loans and advances, not acquiring securities.

Correct Answer: D. Microfinance and small loans

• **NBFC-MFI (Micro Finance Institution)** = an NBFC that primarily lends to low-income borrowers (below ₹3 lakh annual income for rural, ₹3.5 lakh for urban/semi-urban); at least 85% of its net assets must be qualifying microfinance loans. • **Individual loan cap ₹3 lakh** — no single microfinance loan to a borrower can exceed ₹3 lakh; this ensures funds reach genuinely low-income households and are not diverted to large borrowers. • NBFC-MFIs commonly use the Joint Liability Group (JLG) model where a group of 4–10 women jointly guarantee each other's loans, reducing collateral requirements. • 💡 Housing Finance is wrong — that is NBFC-HFC (now regulated by RBI post-2019); Insurance distribution is wrong — that falls under IRDAI-licensed entities or NBFC-Account Aggregators for data, not insurance; Stock market trading is wrong — that is an Investment Company or a SEBI-registered stockbroker.

Correct Answer: B. NBFC-IFC

• **NBFC-IFC (Infrastructure Finance Company)** = must deploy at least 75% of its total assets in infrastructure loans covering sectors like roads, power, telecom, water, ports, and railways. • **Minimum NOF ₹300 crore** — NBFC-IFC must have a minimum Net Owned Fund of ₹300 crore, far above the general ₹2 crore threshold, reflecting the large capital needs of infrastructure projects. • NBFC-IFCs can raise long-term funds from external commercial borrowings and issue Infrastructure Bonds, giving them access to cheaper capital for long-gestation projects. • 💡 NBFC-Factor is wrong — factoring companies purchase trade receivables (invoices), not infrastructure loans; Investment Company is wrong — it acquires market securities (shares/bonds), not infrastructure loans; Loan Company is wrong — it makes general loans and advances without the 75% infrastructure mandate.