NBFCs — Set 4

Correct Answer: C. Core Investment

• **Core Investment Company (CIC)** = a specialized NBFC that holds shares and securities of group companies; at least 90% of its total assets must be invested in group company instruments. • **Exempt from RBI registration if assets < ₹100 crore** — CICs with assets ≥ ₹100 crore and access to public funds must register with RBI; smaller CICs are exempt. • CICs are essentially holding companies for large business groups; they do not trade in securities or extend loans to outsiders. • 💡 Nidhi Company is wrong — it accepts deposits and lends only among its own members; Primary Dealer is wrong — it deals in government securities and is not a holding company; Commercial Bank is wrong — it is a full-fledged bank regulated under the Banking Regulation Act, not an NBFC.

Correct Answer: D. Rs. 500 Crore

• **Rs. 500 Crore** = an NBFC whose asset size (as per the last audited balance sheet) is ₹500 crore or more is classified as a Systemically Important NBFC (NBFC-SI). • **Stricter norms apply to NBFC-SI** — they face tighter capital adequacy, exposure, and disclosure requirements because their failure could ripple through the financial system. • RBI monitors these entities more closely to prevent systemic risk, similar to how D-SIBs are treated in the banking sector. • 💡 Rs. 50 Crore is wrong — too low, no special classification at this level; Rs. 100 Crore is wrong — this is the threshold for CIC registration, not systemic importance; Rs. 1000 Crore is wrong — no such threshold exists for NBFC-SI classification.

Correct Answer: C. No, they are generally not allowed to accept NRI

• **No, NBFCs are generally not allowed to accept NRI deposits** = RBI regulations prohibit most NBFCs from accepting deposits from Non-Resident Indians (NRIs) to control foreign exchange inflows. • **Banks have dedicated NRI deposit schemes** — such as NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts, which are not available to NBFCs. • This restriction is part of FEMA (Foreign Exchange Management Act) compliance and the broader framework to keep foreign capital flows under RBI control. • 💡 'Yes, freely' is wrong — NBFCs do not have blanket permission to accept NRI funds; 'Only during festival season' is wrong — no such seasonal exemption exists in RBI rules; 'Only if NRI is a relative of director' is wrong — no such personal relationship exemption applies.

Correct Answer: C. They must transfer 20% of net profit to a reserve fund.

• **Transfer 20% of net profit to a reserve fund** = under Section 45-IC of the RBI Act, every NBFC must create a statutory reserve fund and transfer at least 20% of its net profit each year before declaring dividends. • **No prior RBI approval needed for withdrawal** — but if any NBFC withdraws from this fund, it must inform RBI within 21 days; amounts cannot be freely used. • This reserve acts as an internal capital buffer, making the NBFC more resilient to loan losses over time. • 💡 'Keep 4% of deposits as cash with RBI' is wrong — that describes CRR for banks, not applicable to deposit-taking NBFCs; 'No such requirement' is wrong — Section 45-IC clearly mandates this; 'Invest 50% in gold' is wrong — no such investment mandate exists for NBFCs.

Correct Answer: D. Asset Finance Company

• **Asset Finance Company (AFC)** = an NBFC whose principal business is financing physical assets that support productive economic activity, such as automobiles, tractors, generators, and lathe machines. • **At least 60% of assets must be in asset financing** — this distinguishes AFC from a general Loan Company; the assets financed are tangible and productive. • AFCs play a critical role in mechanising agriculture and small industries by making equipment affordable through hire-purchase and loans. • 💡 Loan Company is wrong — it provides general loans/advances, not specifically tied to physical productive assets; Infrastructure Debt Fund is wrong — it channels long-term debt into infrastructure projects, not equipment; Investment Company is wrong — it primarily acquires and holds securities, not physical assets.

Correct Answer: D. Current Account Overdraft

• **Current Account Overdraft** = NBFCs cannot offer this facility because they are not allowed to open or maintain current accounts — overdrafts are linked to demand deposits, which are exclusively a banking product. • **NBFCs cannot accept demand deposits** — without a current account relationship, there is no mechanism to extend an overdraft facility. • Gold loans, equipment leases, and microfinance loans are all valid NBFC products because they do not require the customer to hold a deposit account with the NBFC. • 💡 Gold Loan is wrong as an answer — Muthoot Finance and Manappuram Finance (both NBFCs) are leading gold loan providers with LTV capped at 75%; Equipment Lease is wrong as an answer — leasing physical assets is a core AFC/Loan Company function; Micro-finance Loan is wrong as an answer — NBFC-MFIs legally provide small loans up to ₹3 lakh to low-income borrowers.

Correct Answer: B. To facilitate the flow of long-term debt

• **IDF-NBFC facilitates long-term debt into the infrastructure sector** = it takes over post-construction project loans from banks and issues bonds/notes to attract insurance companies and pension funds as investors. • **IDF-NBFCs refinance projects after one year of commercial operation** — this frees up bank capital for new projects while giving institutional investors a stable long-term instrument. • IDF-NBFCs need a minimum net owned fund of ₹300 crore and must have an investment-grade credit rating. • 💡 'Provide insurance for cars' is wrong — that is the role of general insurance companies regulated by IRDAI; 'Provide loans to small farmers' is wrong — that is done by NABARD-supported MFIs and rural NBFCs; 'Trade in international currencies' is wrong — that is the function of Authorised Dealer banks under FEMA.

Correct Answer: A. Giving an asset on rent for a specific

• **Leasing = giving an asset on rent for a specific period** = the NBFC (lessor) transfers the right to use an asset to the customer (lessee) in exchange for periodic rental payments; ownership stays with the NBFC. • **Two types: Finance Lease and Operating Lease** — in a finance lease, economic risks and rewards transfer to lessee; in an operating lease, the NBFC retains most risks and the asset is returned at end of term. • Leasing is common for high-value equipment (medical machines, aircraft, industrial machinery) where the buyer prefers use over ownership. • 💡 'Selling property to the government' is wrong — that is a sale transaction, not a lease; 'Providing insurance coverage' is wrong — that is regulated by IRDAI-registered insurers; 'Acquiring equity in a startup' is wrong — that describes venture capital or an investment company activity.

Correct Answer: A. Yes, to ensure they have enough capital against

• **Yes, NBFCs must maintain a minimum CRAR of 15%** = this ensures they hold sufficient capital relative to their risk-weighted assets, covering credit and market risks. • **For NBFC-MFIs, the minimum CRAR is also 15%** — the ratio is calculated by dividing Tier I + Tier II capital by total risk-weighted assets. • This requirement mirrors bank capital norms and prevents NBFCs from over-leveraging, especially important after the IL&FS crisis of 2018. • 💡 'No, only for banks' is wrong — RBI has mandated CRAR for all registered NBFCs, not just banks; 'Only if government-owned' is wrong — CRAR applies regardless of ownership; 'Only if making losses' is wrong — it is a continuous ongoing requirement, not triggered by losses.

Correct Answer: B. SEBI

• **SEBI (Securities and Exchange Board of India)** = stock broking entities are primarily regulated by SEBI because their core activity is facilitating securities trading in capital markets, which falls squarely under SEBI's jurisdiction. • **SEBI issues the broker license and sets conduct norms** — margin requirements, client fund segregation, KYC rules, and grievance redressal for stock brokers are all SEBI mandates. • RBI may regulate the NBFC aspect of an entity (e.g., if it also accepts deposits), but the broking function remains under SEBI. • 💡 'Stock Exchange only' is wrong — exchanges (NSE, BSE) are self-regulatory organisations but ultimate regulation is with SEBI; 'RBI' is wrong — RBI regulates credit and deposit-related NBFC activities, not securities broking; 'Ministry of Finance' is wrong — MoF sets policy but day-to-day regulation of capital market intermediaries is delegated to SEBI.