NBFCs — Set 2

Correct Answer: C. NBFC-D

• **NBFC-D (Deposit-taking NBFC)** = an NBFC that is authorised by RBI to accept public deposits; because retail depositors are involved, these face the strictest regulations among all NBFC types. • **Credit rating mandatory** — NBFC-D must maintain a Minimum Investment Grade credit rating to accept public deposits; deposits are accepted for a minimum of 12 months and a maximum of 60 months only. • NBFC-D must maintain mandatory liquid assets (SLR equivalent) and comply with capital adequacy norms similar to banks; they represent a small fraction of all NBFCs in India. • 💡 NBFC-ND is wrong — ND stands for Non-Deposit taking, the opposite; NBFC-SI is wrong — SI means Systemically Important (based on asset size ≥₹500 crore), not deposit-taking status; NBFC-MFI is wrong — Microfinance Institutions do not accept public deposits, they raise funds through bank borrowings.

Correct Answer: D. Systemically Important

• **Systemically Important** = an NBFC-ND-SI is a Non-Deposit taking NBFC with total assets of ₹500 crore or more; its large size means its failure could create ripple effects across the financial system. • **₹500 crore threshold (legacy) / ₹10,000 crore for Upper Layer (SBR 2022)** — under the old framework, ≥₹500 crore triggered SI status with tighter norms; under SBR, the Upper Layer (roughly Top 10 NBFCs) now faces near-bank regulation. • Systemically Important NBFCs must comply with leverage ratios, disclosure norms, and capital adequacy requirements that are more stringent than those for smaller NBFCs. • 💡 Statutory Item has no financial regulatory meaning; Standard Institution is a generic phrase, not an RBI classification; Small Investment is the opposite — SI is about large asset size, not small investments.

Correct Answer: A. Reserve Bank of India (RBI)

• **RBI regulates Housing Finance Companies (HFCs) since August 2019** = before this, NHB (National Housing Bank) was the primary regulator; the government transferred HFC regulation to RBI to consolidate oversight of all NBFCs under one regulator. • **NHB's residual role** — after the shift, NHB continues to provide refinancing support to HFCs and manages affordable housing schemes; it is no longer the prudential regulator. • The regulatory shift happened after the IL&FS (2018) and DHFL crises exposed gaps in NBFC oversight; bringing HFCs under RBI was part of broader reforms. • 💡 NHB was the correct answer before 2019 but is now wrong for the current regulatory position; IRDAI is wrong — it regulates insurance companies, not housing lenders; SEBI is wrong — it oversees capital markets, mutual funds, and stockbrokers.

Correct Answer: A. SEBI

• **SEBI regulates Venture Capital Funds** = although venture capital funds are non-banking financial entities, their activity is market-linked (investing in unlisted equity of startups); SEBI oversees them under the SEBI (Alternative Investment Funds) Regulations 2012. • **Category I AIF** — venture capital funds are classified as Category I Alternative Investment Funds under SEBI's AIF framework; they must register with SEBI, not RBI. • RBI's NBFC framework excludes entities whose principal business is venture capital investing because they are primarily capital-market entities; the boundary between RBI and SEBI jurisdiction is determined by the nature of financial activity. • 💡 Ministry of Corporate Affairs is wrong — MCA handles company registration and Nidhi Companies, not VC funds; PFRDA is wrong — it regulates pension funds (NPS), not venture capital; RBI is wrong — VC funds fall squarely under SEBI's AIF regulations.

Correct Answer: A. Ministry of Corporate Affairs

• **Ministry of Corporate Affairs (MCA)** = Nidhi Companies are governed by Section 406 of the Companies Act 2013 and the Nidhi Rules 2014; MCA is the primary authority, not RBI. • **Members-only principle** — Nidhi Companies can only accept deposits from and lend to their own members; they cannot deal with the general public; this closed-loop structure keeps systemic risk low. • RBI gives them a limited exemption from several NBFC provisions (since they deal only with members), but still issues directions on deposit-taking to Nidhi Companies specifically. • 💡 SEBI is wrong — Nidhi Companies do not raise capital from markets or issue securities to the public; RBI is wrong as the primary regulator — it gives limited directions but MCA is the governing authority; Department of Post is wrong — Post Office Savings Schemes are a separate government entity.

Correct Answer: D. 60 months

• **Maximum 60 months (5 years)** = RBI mandates that NBFC-D can accept public deposits only for a period between 12 months and 60 months; no shorter or longer tenure is permitted. • **Minimum 12 months** — unlike bank savings accounts (withdrawable anytime), NBFC deposits must be locked in for at least 1 year; this prevents NBFC-D from functioning like a demand-deposit bank. • This 12–60 month window forces NBFCs to maintain medium-term funding profiles, which aligns with their lending activities and reduces liquidity mismatch risk. • 💡 12 months is the minimum, not the maximum; 36 months is within the permissible range but is not the maximum; 120 months (10 years) far exceeds the RBI-prescribed ceiling and has no regulatory basis for NBFC deposits.

Correct Answer: C. A company engaged in the principal business of factoring.

• **NBFC-Factor** = an NBFC whose principal business is factoring — the purchase of trade receivables (unpaid invoices) from businesses at a discount, giving sellers immediate cash instead of waiting for their buyers to pay. • **Factoring Regulation Act 2011** — NBFC-Factors are governed by this Act; at least 50% of their financial assets and income must come from factoring; they are non-deposit taking by definition. • Factoring improves cash flow for MSMEs: a supplier sells goods worth ₹1 lakh, issues an invoice, and an NBFC-Factor pays ₹95,000 immediately and collects ₹1 lakh from the buyer later. • 💡 Educational loans are wrong — general lending NBFCs or banks offer education loans; NBFC-Factor is specifically about receivables purchase; Chit funds are wrong — they are regulated by State Governments under the Chit Funds Act 1982, not by RBI as NBFC-Factors; Gold loans are wrong — that is an Asset Finance Company or Loan Company activity (e.g., Muthoot Finance).

Correct Answer: B. NBFC-MFI

• **NBFC-MFI** = Micro Finance Institutions target low-income rural and semi-urban borrowers (annual household income ≤ ₹3 lakh rural / ≤ ₹3.5 lakh urban) with small collateral-free loans for income generation. • **Joint Liability Group (JLG) model** — borrowers are organised in self-help groups of 4–10; each member guarantees the others' repayment, replacing collateral; this enables lending to the unbanked. • NBFC-MFIs must not charge interest above the RBI-prescribed cap (currently average cost of funds + 10% spread for large MFIs); repayment frequency can be weekly, fortnightly, or monthly. • 💡 Mortgage Guarantee Company is wrong — it guarantees repayment of housing loans to lenders, not a credit provider to rural borrowers; NBFC-IFC is wrong — it finances large infrastructure projects (roads, power), not rural individuals; Asset Reconstruction Company is wrong — it buys bad loans (NPAs) from banks and tries to recover them.

Correct Answer: A. Financial assets must be 50% of total assets and income

• **50-50 test** = to qualify as an NBFC, financial assets must constitute more than 50% of the entity's total assets AND income from financial assets must exceed 50% of gross income; both conditions must be satisfied simultaneously. • **RBI's 1998 clarification** — RBI introduced this dual quantitative test to distinguish genuine NBFCs from manufacturing or trading companies that also provide some credit; failing either threshold means the entity is not an NBFC. • The test prevents regulatory arbitrage — a steel company cannot call itself an NBFC just because it lends to a few customers; its primary business identity must be financial. • 💡 10 branches is wrong — branch count has no relevance to NBFC classification; stock exchange listing is wrong — unlisted companies can be NBFCs (most are); 100% financial assets is wrong — that is too strict; a company can have some non-financial assets and still qualify if the 50% thresholds are met.

Correct Answer: A. Asset Reconstruction Company (ARC)

• **Asset Reconstruction Company (ARC)** = a specialised NBFC that purchases Non-Performing Assets (NPAs/bad loans) from banks and financial institutions at a discount, helping banks clean their balance sheets. • **SARFAESI Act 2002** — ARCs are registered under this Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest); they have powers to take possession of secured assets without court intervention. • Failed NBFCs like SREI, DHFL, and Reliance Capital had their assets transferred to ARCs or resolved under IBC (Insolvency and Bankruptcy Code 2016); India's largest ARC is ARCIL (Asset Reconstruction Company India Ltd). • 💡 Loan Company is wrong — it disburses new loans, not purchases old bad loans from banks; Mortgage Guarantee Company is wrong — it insures lenders against borrower default on home loans, but does not buy existing NPAs; NBFC-Factor is wrong — it buys trade invoices (receivables) from businesses, not non-performing bank loans.