NBFCs — Set 5

Correct Answer: A. 12 months

• **Minimum 12 months** = RBI prohibits deposit-taking NBFCs from accepting public deposits for any period shorter than 12 months, to ensure a stable funding base. • **Maximum period is 60 months (5 years)** — NBFCs cannot lock in public deposits beyond 60 months either, keeping tenures within a manageable range. • This floor prevents NBFCs from raising short-term funds (like banks' call money) while avoiding the strict liquidity requirements that banks face. • 💡 '6 months' is wrong — deposits shorter than 12 months are explicitly prohibited for NBFCs; '1 month' is wrong — extremely short-term deposits are a bank privilege; '24 months' is wrong — this is above the minimum and is a valid tenure, not the floor.

Correct Answer: D. Investment Company

• **Investment Company** = an NBFC whose principal business is the acquisition and holding of securities (shares, debentures, bonds) for its own account or on behalf of its group. • **Distinct from mutual fund AMCs** — while AMCs manage pooled investor money under SEBI, an NBFC-Investment Company holds securities on its own balance sheet or for group entities. • Their income primarily comes from dividends, interest, and capital gains on the securities portfolio. • 💡 Infrastructure Finance Company is wrong — it provides long-term loans for infrastructure projects, not securities management; Asset Management Company is wrong — AMCs are regulated by SEBI as mutual fund managers, not classified as NBFCs under RBI; Loan Company is wrong — it earns income from interest on loans and advances, not from securities holdings.

Correct Answer: A. They perform bank-like functions outside

• **NBFCs are the primary shadow banking entities in India** = they perform credit intermediation (borrowing and lending) like banks but operate outside the full banking regulatory framework — no CRR/SLR mandate (for non-deposit NBFCs), no DICGC cover. • **IL&FS default (September 2018) exposed shadow banking risks** — the crisis showed how NBFC stress could spread to mutual funds and commercial paper markets, causing a liquidity crunch across the financial system. • FSB (Financial Stability Board) defines shadow banking as 'credit intermediation involving entities and activities outside the regular banking system.' • 💡 'They are illegal entities' is wrong — NBFCs are legally registered and RBI-regulated; 'Banking only in the dark' is wrong — shadow banking is a technical FSB term, not a literal description; 'They only deal in cash' is wrong — NBFCs use standard financial instruments like bonds, commercial paper, and securitisation.

Correct Answer: B. No, they can only accept term deposits.

• **No, NBFCs cannot accept demand deposits** = accepting deposits repayable on demand (like savings or current accounts) is an exclusive privilege of scheduled commercial banks under the Banking Regulation Act. • **NBFCs can only accept term deposits** — with a minimum tenure of 12 months and maximum of 60 months; even these are allowed only if the NBFC holds specific RBI authorisation. • This restriction exists because accepting demand deposits requires participation in the payment system (cheque clearing, RTGS), which NBFCs are not permitted to do. • 💡 'Yes, like a bank' is wrong — that would make the NBFC a bank, requiring a banking licence; 'Only from the government' is wrong — no such exception exists in RBI rules; 'Only with special licence' is wrong — even with RBI authorisation to accept deposits, these must be term deposits, not demand deposits.

Correct Answer: B. NABARD

• **NABARD (National Bank for Agriculture and Rural Development)** = provides refinance — i.e., wholesale funds at concessional rates — to NBFCs that on-lend for agricultural and rural development purposes. • **NABARD refinance keeps rural credit affordable** — by reducing the cost of funds for NBFCs, it allows them to offer lower interest rates to farmers and rural borrowers. • NABARD was established in 1982 under the NABARD Act and operates under RBI and Government of India oversight. • 💡 RBI is wrong — RBI is the regulator and lender of last resort, not a direct refinance provider to rural NBFCs; SIDBI is wrong — SIDBI provides refinance specifically for MSMEs (small and medium enterprises), not agriculture; NHB is wrong — National Housing Bank provides refinance to Housing Finance Companies (HFCs), not rural/agriculture NBFCs.

Correct Answer: A. A company financing the purchase of

• **A company financing the purchase of commercial vehicles (trucks)** = this is a textbook example of an AFC because it finances a physical productive asset — the truck — which directly supports economic activity like transportation and logistics. • **Other classic AFC examples** — financing tractors for farmers, construction equipment, industrial machinery, and two-wheelers for last-mile delivery; over 60% of assets must be in such productive physical asset financing. • Companies like Shriram Transport Finance and Mahindra Finance are well-known AFCs focused on commercial vehicle and rural equipment financing. • 💡 'Company providing personal insurance' is wrong — insurance is an IRDAI domain, not NBFC-AFC; 'Company providing gold loans' is wrong — gold loan NBFCs (Muthoot, Manappuram) are classified as Loan Companies, not AFCs; 'Company trading in foreign exchange' is wrong — forex dealing requires AD (Authorised Dealer) licence from RBI under FEMA, not an AFC classification.

Correct Answer: B. PFRDA

• **PFRDA (Pension Fund Regulatory and Development Authority)** = governs all entities that manage pension funds, including non-banking entities that act as pension fund managers under the National Pension System (NPS). • **PFRDA was established in 2003 and given statutory status in 2013** — it regulates contribution collection, fund management mandates, and pension payouts for both government and private sector employees. • Pension fund managers (like SBI Pension Funds, LIC Pension Fund) are licensed and supervised by PFRDA, not RBI. • 💡 SEBI is wrong — SEBI regulates securities markets and mutual funds, not pension fund managers; RBI is wrong — RBI regulates credit, banking, and NBFCs engaged in lending/deposit-taking, not pension management; IRDAI is wrong — IRDAI regulates insurance companies, which include annuity products but not pension fund management under NPS.

Correct Answer: D. To accept public deposits.

• **Investment Grade credit rating is mandatory to accept public deposits** = every deposit-taking NBFC (NBFC-D) must obtain a minimum investment-grade credit rating from a SEBI-registered credit rating agency (like CRISIL, ICRA, CARE, or India Ratings). • **Rating must be renewed annually** — if an NBFC's rating falls below investment grade, it cannot accept new deposits or renew existing ones; it must repay depositors as deposits mature. • The rating signals the NBFC's ability to repay depositors on time, giving the public a risk indicator before placing money. • 💡 'Open a branch abroad' is wrong — overseas operations are governed by FEMA and RBI's foreign branch policy, not a credit rating requirement; 'Hire more than 100 employees' is wrong — staff strength has no regulatory link to credit ratings; 'Lend to the government' is wrong — lending to the government (buying G-Secs) requires no credit rating, as the sovereign is the borrower.

Correct Answer: B. NBFCs are mandatory members of all CICs.

• **NBFCs are mandatory members of all Credit Information Companies** = RBI requires all NBFCs to become members of every CIC (CIBIL, Equifax, Experian, CRIF Highmark) and submit borrower data regularly. • **Dual benefit: report and query** — NBFCs must report repayment data of their borrowers and can also query the credit history of new loan applicants, helping in risk assessment. • This mandatory membership prevents borrowers from hiding defaults across multiple lenders and reduces NPAs in the NBFC sector. • 💡 'NBFCs cannot access credit scores' is wrong — as CIC members, NBFCs have full access to credit bureau reports; 'CICs do not store NBFC loan data' is wrong — CICs specifically collect and store data from all credit institutions including NBFCs; 'Only banks are allowed to be members' is wrong — the Credit Information Companies (Regulation) Act 2005 allows all credit institutions, including NBFCs, to be members.

Correct Answer: A. They have fewer regulations and

• **Fewer regulations and faster loan processing** = NBFCs have more flexible credit appraisal norms, simpler documentation requirements, and quicker turnaround times compared to banks, making them accessible to underserved borrowers. • **NBFCs reach segments banks avoid** — small businesses, self-employed professionals, rural borrowers, and those with limited credit history often find NBFCs more accessible than formal banks. • This is also why NBFCs are called 'last-mile lenders' — they bridge the gap between formal banking and unbanked/under-banked populations. • 💡 'Lower interest rates' is wrong — NBFCs typically charge higher rates than banks because they face higher funding costs and credit risk; 'Can print their own money' is wrong — money creation is exclusively the RBI's domain; 'Immune to losses' is wrong — NBFCs are exposed to credit risk and have faced major crises (ILFS, DHFL defaults).