About the Non-Banking Financial Companies (NBFCs) in India - Prelims MCQs

 

1)  Consider the following statements about the Non-Banking Financial Companies (NBFCs) in India:

1.   NBFCs cannot accept demand deposits.

2.   All the NBFCs operating in India have to be registered with the RBI.

3.   NBFCs form part of the payment and settlement system and can issue cheque drawn on itself.

4.   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?

a)  1 and 4

b)  1, 2 and 3

c)   4 only

d)  2, 3 and 4

 

Correct Answer: (a) 1 and 4

Explanation:

• Statement 1 is correct: Unlike commercial banks, NBFCs are legally prohibited from accepting demand deposits (Savings Accounts and Current Accounts). They can only accept term deposits (time deposits), and even then, only specific "Deposit-taking NBFCs" (NBFC-D) authorized by the RBI are allowed to do so.
• Statement 2 is incorrect: This is a classic absolute statement trap ("All"). While the RBI is the primary regulator for most NBFCs, companies whose main business falls under the regulatory purview of other financial regulators are exempt from RBI registration to avoid dual regulation. For example, Venture Capital Funds and Merchant Bankers are regulated by SEBI, Insurance companies by IRDAI, and Nidhi Companies by the Ministry of Corporate Affairs.
• Statement 3 is incorrect: NBFCs do not form part of the national payment and settlement system. Consequently, they cannot issue cheques drawn on themselves to their customers.
• Statement 4 is correct: The Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance cover (up to ₹5 lakhs) exclusively for bank deposits (Commercial Banks, RRBs, Cooperative Banks, etc.). Depositors who place their money in deposit-taking NBFCs do not get DICGC protection, making NBFC deposits inherently riskier than bank deposits.

 

Strategy: Spot the extreme word "All" in Statement 2. In the Indian financial ecosystem, regulatory overlap is common, and exceptions almost always exist (like SEBI regulating merchant banking NBFCs). Knowing that Statement 2 is false instantly eliminates options (b) and (d). Between (a) and (c), you just need to confirm that Statement 1 is undeniably true (which is the most fundamental difference between a bank and an NBFC).