NBFCs — Set 6

Correct Answer: C. Only those with a specific license from RBI can

• **Only RBI-authorised NBFCs (NBFC-D) can accept public deposits** = a small subset of NBFCs that hold a specific Certificate of Registration for deposit-taking from RBI are permitted; this category is shrinking as RBI tightens norms. • **Conditions for NBFC-D** — must have investment-grade credit rating, maintain liquid assets (SLR equivalent), and cannot offer deposits below 12 months or above 60 months tenure. • Most NBFCs in India are non-deposit taking (NBFC-ND) and raise funds through debentures, commercial paper, and bank borrowings instead. • 💡 'All NBFCs can accept deposits' is wrong — the vast majority of NBFCs are non-deposit taking; 'Only government-owned NBFCs' is wrong — ownership type does not determine deposit-taking rights; 'No NBFC is allowed' is wrong — while rare, RBI-authorised deposit-taking NBFCs do legally exist.

Correct Answer: C. Banks can accept demand deposits, but NBFCs

• **Banks can accept demand deposits; NBFCs cannot** = scheduled commercial banks can maintain savings accounts, current accounts, and call deposits that customers can withdraw at any time — this is a bank-exclusive privilege under the Banking Regulation Act. • **This is the most fundamental NBFC vs. Bank difference** — it is the reason NBFCs are excluded from the payment and settlement system (no cheque issuance, no RTGS/NEFT settlement accounts). • Demand deposits require the institution to be part of the RBI's payment infrastructure; NBFCs do not have that infrastructure access. • 💡 'Both can accept equally' is wrong — NBFCs are legally prohibited from demand deposits; 'Banks cannot but NBFCs can' is wrong — the reverse is true; 'Neither can accept' is wrong — accepting demand deposits is the core banking function of scheduled commercial banks.

Correct Answer: D. Ability to issue cheques drawn on itself

• **NBFCs cannot issue cheques drawn on themselves** = cheque issuance requires membership of the payment and settlement system — only banks participate in cheque clearing through the Clearing Corporation of India Ltd (CCIL) and RBI's payment infrastructure. • **All the other three options ARE valid NBFC features** — minimum Net Owned Fund of ₹2 crore is required for RBI registration; NBFCs must be registered as companies under the Companies Act 2013; lending is their core activity. • This distinction highlights why NBFCs are not substitutes for banks — they cannot facilitate everyday payment transactions. • 💡 'Minimum Net Owned Fund requirement' is wrong as an answer — this IS an NBFC feature (₹2 crore NOF required); 'Registration under Companies Act' is wrong as an answer — NBFCs must mandatorily be incorporated as companies; 'Engagement in lending' is wrong as an answer — providing loans and advances is the primary business of most NBFCs.

Correct Answer: D. RBI

• **RBI (Reserve Bank of India)** = is the primary regulator for most NBFCs in India under Chapter III-B of the RBI Act 1934 (Section 45-IA to 45-MB); it grants the Certificate of Registration and monitors compliance. • **Sector-specific exceptions exist** — Housing Finance Companies (HFCs) are regulated by RBI (transferred from NHB in 2019); stock broking NBFCs by SEBI; pension fund NBFCs by PFRDA; insurance entities by IRDAI. • RBI's NBFC regulation covers registration, capital adequacy, prudential norms, fair practices, KYC/AML, and customer protection. • 💡 IRDAI is wrong — IRDAI regulates insurance companies, not general NBFCs; SEBI is wrong — SEBI regulates capital market intermediaries like stock brokers and mutual funds, not credit-based NBFCs; NABARD is wrong — NABARD provides refinance and development finance but does not regulate NBFCs.

Correct Answer: B. Rs. 2 Crore

• **Minimum NOF = ₹2 Crore** = to obtain a Certificate of Registration from RBI under Section 45-IA of the RBI Act, a new NBFC must have a minimum Net Owned Fund of ₹2 crore. • **Net Owned Fund = Paid-up capital + Free reserves − Accumulated losses − Deferred expenditure** — it measures the genuine capital base of the NBFC, excluding borrowed funds. • RBI raised this threshold from ₹25 lakh to ₹2 crore over the years to ensure only financially sound entities enter the NBFC space. • 💡 Rs. 5 Crore is wrong — this is sometimes confused with HFC minimum NOF (₹10 crore), not the standard NBFC threshold; Rs. 50 Lakh is wrong — this was an older threshold, now superseded; Rs. 25 Lakh is wrong — this was the original very old threshold, now obsolete.

Correct Answer: B. The depositors can sue the NBFC, but there is no DICGC

• **No DICGC insurance for NBFC deposits** = unlike bank deposits (insured up to ₹5 lakh per depositor by DICGC), NBFC deposits have no deposit insurance; depositors bear the full credit risk of the NBFC. • **Depositors can pursue legal remedies** — they can file complaints with RBI's Ombudsman for NBFCs, approach consumer courts, or initiate insolvency proceedings under the IBC against the NBFC. • This absence of insurance is a key risk for the public — the DHFL collapse (2019) left lakhs of depositors scrambling to recover their money from an uninsured NBFC. • 💡 'RBI will pay depositors' is wrong — RBI is the regulator, not an insurer or guarantor of NBFC deposits; 'Deposits automatically convert to shares' is wrong — no such automatic conversion mechanism exists; 'Government takes over' is wrong — while resolution under IBC is possible, automatic government takeover is not the rule.

Correct Answer: B. Only their members

• **Nidhi Companies deal only with their own members** = they are mutual benefit societies that borrow from members and lend only to members; they cannot transact with the general public or corporates. • **Nidhi Companies are governed by the Companies Act 2013 and MCA** — the Ministry of Corporate Affairs (MCA) oversees them, though RBI has exempted them from most NBFC regulations since their operations are self-contained. • Their primary purpose is to promote the habit of thrift and savings among members, often found in South India under names like 'Nidhi' or 'Mutual Benefit Fund.' • 💡 'Foreign companies' is wrong — Nidhis are closed-member societies with no cross-border dealings; 'General public' is wrong — accepting deposits from non-members is prohibited for Nidhi companies; 'State governments' is wrong — Nidhis are private member-based entities with no government dealings as part of their business model.

Correct Answer: D. NBFC-MFI

• **NBFC-MFI (Micro Finance Institution)** = provides small loans to low-income borrowers who lack access to formal banking; minimum 85% of its net assets must be qualifying assets (loans to low-income households). • **Key MFI lending limits** — maximum loan per borrower is ₹3 lakh; interest rate must not exceed the cost of funds plus 10% margin (for large MFIs) or 12% (for smaller ones); loan tenure ≥ 24 months for loans > ₹30,000. • RBI regulates NBFC-MFIs; they replaced earlier SHG-bank linkage models and now drive formal credit access in rural and semi-urban India. • 💡 Loan Company is wrong — it provides general loans without the specific low-income borrower mandate or qualifying asset restrictions of an MFI; NBFC-IFC is wrong — Infrastructure Finance Company funds large infrastructure projects, not micro-borrowers; Asset Finance Company is wrong — AFCs finance physical productive assets like vehicles and machinery, not micro-enterprise working capital.

Correct Answer: A. Loan Company

• **Loan Company** = an NBFC whose principal business is providing finance through loans or advances (not including companies whose principal business is asset financing — that would be an AFC). • **Loan Companies are distinct from AFCs** — a Loan Company provides personal loans, business loans, and working capital without the specific requirement that 60%+ of assets be in physical productive asset financing. • They are one of the most common NBFC types and are the backbone of India's retail credit market for SMEs and individuals. • 💡 Investment Company is wrong — its principal business is acquiring and holding securities, not making loans; Insurance Company is wrong — insurance is regulated by IRDAI and is not classified as an NBFC under RBI; Factoring Company is wrong — it purchases trade receivables (invoice financing) rather than making direct loans or advances.

Correct Answer: B. It cannot exceed the ceiling rate

• **Interest rate on public deposits cannot exceed the RBI-prescribed ceiling** = RBI periodically sets a maximum (ceiling) interest rate for NBFC public deposits to prevent NBFCs from offering unsustainably high rates to attract depositors. • **Current RBI ceiling is linked to bank FD rates** — typically capped at a spread above the SBI term deposit rate or at an absolute ceiling; exceeding this rate makes the deposit contract invalid. • This regulation prevents a 'race to the top' where distressed NBFCs lure depositors with high rates, only to default — a pattern seen in chit fund and Ponzi schemes. • 💡 'Any rate they want' is wrong — unrestricted rate-setting by deposit-taking NBFCs is not permitted; 'Always 10%' is wrong — the ceiling is not fixed at a permanent 10%; it is a dynamic RBI-set limit; 'Fixed by each NBFC separately' is wrong — individual NBFCs cannot set their own ceilings; the RBI ceiling is a regulatory maximum that all must follow.