Consider the following statements about the Non-Banking Financial Companies (NBFCs) in India :
- NBFCs cannot accept demand deposits.
- All the NBFCs operating in India have to be registered with the RBI.
- NBFCs form part of the payment and settlement system and can issue cheque drawn on itself.
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to the depositors of deposit taking NBFCs.
Which of the statements given above is/are correct ?
Detailed Explanation:
Statement 1 — Correct. NBFCs cannot accept demand deposits (savings/current accounts). Some NBFCs CAN take fixed/term deposits, but only with special RBI permission.
Statement 2 — Incorrect. Not ALL NBFCs register with RBI. Some are regulated by other bodies:
- Venture Capital Funds, Merchant Banks → SEBI
- Insurance companies → IRDAI
- Nidhi companies → Ministry of Corporate Affairs
- Chit Funds → State Governments
Statement 3 — Incorrect. NBFCs are NOT part of the payment & settlement system. So they cannot issue cheques drawn on themselves.
Statement 4 — Correct. DICGC insurance (₹5 lakh cover) is only for bank depositors — NOT available to NBFC depositors.
Memory Trick: NBFC = "Bank-like, but NOT a bank" → no demand deposits, no own cheques, no DICGC, not all need RBI registration.
Short Notes on NBFCs
What is an NBFC? A company registered under the Companies Act, engaged in lending, investments, leasing, etc. — but NOT a bank.
Key Differences from Banks:
| Feature | Bank | NBFC |
|---|---|---|
| Demand deposits | ✅ Allowed | ❌ Not allowed |
| Issue own cheques | ✅ Yes | ❌ No |
| Part of payment system | ✅ Yes | ❌ No |
| DICGC insurance | ✅ Yes (₹5 lakh) | ❌ No |
| CRR/SLR maintenance | ✅ Mandatory | ❌ Not required |
| Regulator | RBI (always) | RBI usually, but some by SEBI/IRDAI/MCA/State Govt |
Who Regulates NBFCs (besides RBI)?
- SEBI → Venture Capital Funds, Merchant Banking companies
- IRDAI → Insurance companies
- Ministry of Corporate Affairs → Nidhi companies
- State Governments → Chit Fund companies
Types of NBFCs (common ones):
- AFC – Asset Finance Company
- IFC – Investment & Credit Company
- Microfinance NBFC
- Housing Finance Company
- Infrastructure Finance Company
- Core Investment Company
Why NBFCs Matter (Significance):
- Reach last-mile borrowers banks often skip (rural, MSME, informal sector)
- Provide credit faster, with simpler paperwork
- Important for financial inclusion
Common Risk Area in News:
- NBFC liquidity crises (e.g., IL&FS crisis)
- RBI's Scale-Based Regulation (SBR) framework for NBFCs (since 2021) — categorizes NBFCs into Base, Middle, Upper, and Top layers based on risk
Question 2 of 15 Banking Structure in India
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