NBFCs — Set 3

Correct Answer: C. Guaranteeing the repayment of mortgage loans

• **Mortgage Guarantee Company** = provides a financial guarantee to lenders (banks/HFCs) against default by home loan borrowers; if the borrower cannot repay, the MGC compensates the lender up to the guaranteed amount. • **90% revenue from guarantee activity** — at least 90% of the MGC's business turnover must come from mortgage guarantee business; India's first MGC is India Mortgage Guarantee Corporation (IMGC), promoted by NHB. • MGCs enable lenders to offer higher loan-to-value ratios to borrowers (e.g., up to 90% of property value) because default risk is partly transferred to the MGC, making home loans more accessible. • 💡 Car loans are wrong — that is vehicle financing done by Asset Finance Companies like Mahindra Finance or Shriram Finance; Managing the stock market is wrong — SEBI and stock exchanges do that; Printing currency notes is wrong — only the RBI (under the Currency Note Press) does so.

Correct Answer: A. State Governments

• **State Governments regulate Chit Funds** = under the Chit Funds Act 1982, each State Government is responsible for regulating chit fund companies operating within its borders through a Registrar of Chit Funds. • **Chit Funds Act 1982** — this Central Act provides the legal framework, but enforcement and regulation is delegated to State Governments; chit funds are explicitly excluded from RBI's NBFC regulatory purview. • A chit fund is a savings-cum-credit scheme where a group of members contribute fixed amounts periodically and take turns winning the pool through auction or lot; it serves both savers and borrowers. • 💡 SEBI is wrong — it regulates securities markets; chit funds are not securities instruments; IRDAI is wrong — it regulates insurance; RBI is wrong — RBI explicitly exempts chit funds from NBFC registration requirements under Section 45I(f) of the RBI Act.

Correct Answer: B. Insurance Company

• **Insurance Companies are NOT regulated by RBI** = they are regulated by IRDAI (Insurance Regulatory and Development Authority of India) under the Insurance Act 1938 and Insurance Regulatory and Development Authority Act 1999. • **IRDAI's mandate** — IRDAI sets solvency margins, premium rates, policy conditions, and conduct norms for insurers; it has no overlap with RBI's NBFC framework. • RBI regulates NBFC-MFIs, Asset Finance Companies, Loan Companies, Investment Companies, NBFC-IFC, NBFC-Factor, ARCs, and Account Aggregators — all financial entities whose principal business is lending or investing. • 💡 NBFC-MFI is wrong as an answer — RBI does regulate MFIs; Asset Finance Company is wrong — RBI regulates AFCs (now under NBFC-ICC); Loan Company is wrong — Loan Companies are squarely under RBI's NBFC purview.

Correct Answer: C. Owned funds like equity and free reserves

• **Tier 1 Capital = core owned funds** = consists of paid-up equity capital, statutory reserves, free reserves, and retained earnings minus accumulated losses and deferred revenue expenditure; it is permanently available to absorb losses. • **Capital Adequacy Ratio (CRAR)** — RBI requires NBFCs to maintain minimum Tier 1 capital ratios; for NBFC-ND-SI and NBFC-D, the minimum Tier 1 capital is 10% of risk-weighted assets (as per SBR 2022 norms). • Tier 1 capital is considered the highest quality capital because it is loss-absorbing on a going-concern basis — the NBFC does not need to liquidate to use it. • 💡 Customer deposits are wrong — deposits are liabilities, not capital; if anything, accepting too many deposits without adequate Tier 1 capital creates insolvency risk; Loans from other banks are wrong — borrowings are debt obligations, not equity; Subordinated debt is Tier 2 capital — it absorbs losses only in liquidation, not on a going-concern basis.

Correct Answer: B. PFC (Power Finance Corporation)

• **Power Finance Corporation (PFC)** = a Government of India Navratna NBFC-ND-SI specifically mandated to finance power generation, transmission, and distribution projects across India; it is registered with RBI as an NBFC. • **PFC's classification** — PFC is categorised as an Infrastructure Finance Company (NBFC-IFC) given that over 75% of its assets are in infrastructure (power sector) loans; it can raise cheaper funds through bonds and ECBs. • PFC also manages RDSS (Revamped Distribution Sector Scheme) and administers central government grants for power distribution improvement — blending lending with policy implementation. • 💡 NBFC-Factor is wrong — factoring companies buy trade invoices from businesses, not power sector loans; Investment Company is wrong — it acquires market securities, not project loans; Micro Finance Institution is wrong — MFIs serve low-income rural borrowers with small loans, not trillion-rupee power projects.

Correct Answer: D. No, they cannot exceed the maximum rate prescribed by RBI.

• **NBFCs cannot offer interest rates above RBI's ceiling** = RBI prescribes the maximum rate of interest (currently 12.5% per annum) that an NBFC-D can offer on public deposits; no exceptions are allowed. • **Purpose of the cap** — prevents NBFCs from entering into a rate war to attract deposits, which would force them to take excessive credit risk to generate higher returns and could destabilise the system. • This rule applies strictly to deposit-taking NBFCs (NBFC-D); non-deposit-taking NBFCs do not raise public deposits at all and are not affected. • 💡 High profits exception is wrong — profitability gives no regulatory exemption on deposit rates; 'attract more customers' is wrong — commercial motivation cannot override RBI regulation; Senior citizens exception is wrong — unlike some banks that offer slightly higher rates to senior citizens, NBFC-D has no such provision under RBI norms.

Correct Answer: B. To resolve customer grievances

• **Ombudsman Scheme for NBFCs (2018)** = launched by RBI to provide a free, speedy, and independent redressal mechanism for complaints against NBFCs with asset size ≥₹100 crore that are deposit-taking or non-deposit-taking but with public interest. • **Merged into Integrated Ombudsman Scheme (2021)** — RBI later unified the NBFC Ombudsman, Banking Ombudsman, and Digital Payments Ombudsman into a single Integrated Ombudsman Scheme for seamless grievance redressal. • Customers can file complaints if their NBFC does not resolve issues within 30 days, if the resolution is unsatisfactory, or if the NBFC fails to follow RBI's Fair Practices Code. • 💡 Auditing NBFC accounts is wrong — that is done by Statutory Auditors and RBI's inspection teams, not the Ombudsman; Providing loans to NBFCs is wrong — the Ombudsman is a dispute-resolution body, not a lender; Registering new NBFCs is wrong — that is done by RBI's Department of Regulation through the Certificate of Registration process.

Correct Answer: D. Providing finance by making loans or advances

• **Loan Company** = an NBFC whose principal business is providing finance by making loans or advances (other than for physical/productive assets like vehicles or machinery — that would be an Asset Finance Company). • **Merged into NBFC-ICC** — under RBI's 2022 Scale-Based Regulation, Loan Companies were merged with Investment Companies and Asset Finance Companies into NBFC-ICC (Investment and Credit Company); however, the classical definition remains exam-relevant. • Loan Companies provide personal loans, business loans, working capital finance, and consumer credit; examples include Bajaj Finance and Tata Capital Financial Services. • 💡 Managing mutual funds is wrong — that is an Asset Management Company regulated by SEBI, not a Loan Company; Gold trading is wrong — gold trading is a commodity business outside NBFC scope (gold loans by NBFCs like Muthoot are loans secured against gold, not gold trading); Leasing of aircraft is wrong — that is an Asset Finance Company activity (operating/finance lease of physical assets).

Correct Answer: B. They do not take deposits or provide loans; they only consolidate financial data.

• **NBFC-Account Aggregator (AA)** = a unique RBI-licensed NBFC that acts purely as a data intermediary — it retrieves and shares a customer's financial data (bank accounts, insurance, mutual funds, pensions) across institutions with the customer's explicit consent. • **No lending, no deposits** — unlike all other NBFCs, an AA cannot lend money, take deposits, or hold financial assets; its sole function is consented data flow between Financial Information Providers (FIPs) and Financial Information Users (FIUs). • The AA ecosystem (launched 2021) is based on RBI's Account Aggregator Framework; it enables lenders to make faster, data-driven credit decisions for borrowers who share their financial data digitally. • 💡 High-value loans is wrong — AAs are explicitly prohibited from any lending activity; Not regulated by RBI is wrong — AAs are strictly regulated by RBI and require a Certificate of Registration; Only government accounts is wrong — AAs can aggregate data from banks, NBFCs, mutual funds, insurance companies, and pension funds (all consented private and public accounts).

Correct Answer: A. Its registration can be cancelled by the RBI.

• **RBI can cancel the Certificate of Registration (CoR)** = maintaining the minimum Net Owned Fund is a continuous mandatory condition; failure allows RBI to invoke Section 45-IA(6) of the RBI Act and cancel the NBFC's CoR, effectively shutting it down. • **Escalating penalties before cancellation** — RBI typically issues show-cause notices, directs corrective action, and imposes penalties before cancelling registration; cancellation is the ultimate consequence of sustained non-compliance. • After CoR cancellation, the entity cannot carry on any NBFC business; continued operation after cancellation is a criminal offence under the RBI Act. • 💡 Jail for directors immediately is wrong — criminal prosecution is possible for wilful violations but does not happen automatically; it requires a separate legal process; Continuing with a fine is wrong — RBI can impose penalties but also has full authority to cancel registration, not merely levy a fine; Automatic bank conversion is wrong — becoming a bank requires a completely separate licence from RBI under the Banking Regulation Act, a lengthy process entirely unrelated to NBFC NOF compliance.