Which one of the following statements about Non-Banking Financial Companies (NBFCs) is not correct?
- (a)NBFCs cannot accept demand deposits.
- (b)NBFCs cannot give loans.
- (c)NBFCs cannot issue cheques drawn on themselves.
- (d)NBFCs cannot offer deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation.
Correct — B, NBFCs cannot give loans. Lending is exactly what makes a company an NBFC. The Reserve Bank's own definition describes it as a company 'engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities ... leasing, hire-purchase, etc., as their principal business', so a claim that these companies cannot give loans contradicts the definition. The other three options are lifted almost word for word from the Reserve Bank's list of what separates an NBFC from a bank: 'NBFCs cannot accept demand deposits'; they 'do not form part of the payment and settlement system and cannot issue cheques drawn on itself'; and the 'Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of deposit taking NBFCs'.
- (a)NBFCs cannot accept demand deposits. — This is correct, and it is the first of the Reserve Bank's three stated differences. Some NBFCs may accept term deposits with a fixed maturity, but no NBFC may take money repayable on demand — that is, current or savings account money.
- (c)NBFCs cannot issue cheques drawn on themselves. — Correct as well, and it follows from the previous point. An NBFC is not a member of the payment and settlement system, so there is no account of yours at an NBFC on which a cheque could be drawn.
- (d)NBFCs cannot offer deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation. — Correct, and it is the point that matters most to a depositor. Bank deposits are insured by DICGC up to ₹5 lakh per depositor per bank; deposits with an NBFC carry no such cover.
A non-banking financial company does much of what a bank does on the asset side — it lends, it leases, it finances vehicles and gold and consumer purchases, it invests in securities — but it is kept out of the payments system on the liability side. It cannot hold your current account, it cannot settle cheques, and its depositors are not insured. That asymmetry is deliberate: NBFCs are allowed to take more credit risk and serve borrowers banks find hard to reach, and in exchange they are denied the public safety net that comes with deposit banking.
A NOT question with three near-identical negatives usually has one option that is not a restriction at all but a description of the business. Run the test option by option: could an NBFC exist if it could not do this? A finance company with no demand deposits, no chequebook and no deposit insurance is a perfectly ordinary NBFC. A finance company that could not lend would not be a finance company. That reasoning finds the answer without recalling any regulation. As of the September 2022 exam the RBI had already announced, but not yet started, a new supervisory architecture: the Scale Based Regulation framework of October 2021 sorts NBFCs into base, middle, upper and top layers and came into force on 1 October 2022, weeks after this paper. The three restrictions in the options are unchanged by it.
- An NBFC is a company whose principal business is loans and advances, acquisition of securities, leasing or hire-purchase.
- NBFCs cannot accept demand deposits; deposit-taking NBFCs may only take term deposits.
- NBFCs are outside the payment and settlement system and cannot issue cheques drawn on themselves.
- DICGC deposit insurance does not extend to depositors of deposit-taking NBFCs.
- The Reserve Bank's Scale Based Regulation framework, issued 22 October 2021, took effect on 1 October 2022 and places NBFCs in base, middle, upper and top layers.
- Reading 'cannot accept demand deposits' as 'cannot accept deposits at all' — some NBFCs are permitted term deposits.
- Assuming an NBFC's deposits are safe because the Reserve Bank regulates it; regulation is not insurance.
- Confusing an NBFC with a small finance bank or a payments bank, which are banks and do sit in the payment system.
Almost always as a NOT-correct statement item on what an NBFC may or may not do, occasionally as a comparison with banks on a single feature such as deposit insurance.
With reference to the Non-banking Financial Companies (NBFCs) in India, consider the following statements: 1. They cannot engage in the acquisition of securities issued by the government. 2. They cannot accept demand deposits like Savings Account. Which of the statements given above is/are correct?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer(b) 2 only
The same trap in a two-statement format. UPSC pairs the genuine restriction on demand deposits with an invented restriction on holding securities; CDS pairs it with an invented restriction on lending. Both times the false statement is the one that would stop an NBFC being a finance company.
- practice — not a real PYQ
Which one of the following facilities is available to depositors of a scheduled commercial bank but not to depositors of a deposit-taking non-banking financial company?
- (a)A fixed rate of interest
- (b)Insurance cover from the Deposit Insurance and Credit Guarantee Corporation
- (c)Nomination on the deposit
- (d)Premature withdrawal
Answer(b) Insurance cover from the Deposit Insurance and Credit Guarantee Corporation — DICGC cover does not extend to NBFC depositors.
- practice — not a real PYQ
Under the Reserve Bank of India's Scale Based Regulation framework for NBFCs, which layer is intended to remain empty?
- (a)Base Layer
- (b)Middle Layer
- (c)Upper Layer
- (d)Top Layer
Answer(d) Top Layer — the framework states that it will ideally remain empty, and an NBFC would be pushed into it only on a substantial increase in systemic risk.