Chapter 5: Non-banking Financial Companies (NBFCs) (CAIIB – Paper 4)

1. Who is the primary regulator of NBFCs in India?

• A. Ministry of Finance
• B. SEBI
• C. Reserve Bank of India (RBI)
• D. SIDBI

The Reserve Bank of India (RBI) is the primary regulator of NBFCs, overseeing their registration, operations, and compliance under the RBI Act.

2. Which of the following is a key role of NBFCs in promoting inclusive growth?

• A. Providing credit to unbanked and under-served sectors
• B. Issuing government securities
• C. Conducting monetary policy operations
• D. Printing currency notes

NBFCs promote inclusive growth by providing financial services to individuals and sectors that are typically underserved by banks.

3. What is mandatory for an entity to operate as an NBFC in India?

• A. Minimum paid-up capital of ₹10 crore
• B. Registration with SEBI
• C. Approval from Ministry of Corporate Affairs only
• D. Registration with the RBI

An entity must obtain registration from the RBI to legally operate as an NBFC in India under the RBI Act.

4. Under the Revised Scale Based Regulatory (SBR) Framework, NBFCs are categorized based on:

• A. Number of employees
• B. Size, activity, and risk profile
• C. Annual profit only
• D. Location of registered office

The RBI's Revised Scale Based Regulatory Framework classifies NBFCs according to size, activity, and risk profile to ensure proportionate regulation.

5. Which of the following is NOT a regulator or supervisory authority for NBFCs?

• A. RBI
• B. SEBI (for specific investment companies)
• C. IRDAI for NBFC operations
• D. Ministry of Corporate Affairs

IRDAI regulates insurance companies, not NBFCs, so it is not a regulator for NBFC operations.

6. Which term is used to classify NBFCs based on the type of activities they perform?

• A. Banking Company
• B. Nomenclature of NBFC (e.g., NBFC-MFI, NBFC-Factor)
• C. Co-operative Society
• D. Private Limited Company

RBI classifies NBFCs based on activities (e.g., NBFC-MFI for microfinance, NBFC-Factor for factoring) to ensure sector-specific regulation.

7. What is the minimum Capital to Risk (Weighted) Assets Ratio (CRAR) prescribed by RBI for systemically important NBFCs?

• A. 5%
• B. 8%
• C. 15%
• D. 25%

RBI requires systemically important NBFCs to maintain a minimum CRAR of 15% to ensure adequate capital for risk coverage.

8. Prudential norms for NBFCs include all EXCEPT:

• A. Asset classification
• B. Provisioning requirements
• C. Capital adequacy norms
• D. Employee bonus calculation

Prudential norms focus on risk management, asset quality, and capital adequacy. Employee bonus calculation is not part of prudential norms.

9. Corporate governance in NBFCs primarily aims to:

• A. Ensure transparency, accountability, and protection of stakeholders
• B. Maximize short-term profits only
• C. Increase branch network
• D. Avoid RBI regulations

Corporate governance ensures accountability, transparency, and sound management practices to protect stakeholders’ interests in NBFCs.

10. Which of the following is mandatory for NBFCs under corporate governance guidelines issued by RBI?

• A. Appointment of only executive directors
• B. Constitution of Board committees like Audit Committee
• C. Maintaining a minimum branch network
• D. Publishing annual interest rates in newspapers

RBI mandates NBFCs to have proper board structures, including committees such as Audit and Risk Committees, to ensure good governance.

11. Which capital component is considered Tier I capital for NBFCs?

• A. Subordinated debt
• B. Preference shares
• C. Equity capital and disclosed reserves
• D. Hybrid instruments

Tier I capital for NBFCs primarily consists of equity capital and disclosed reserves, which form the core of financial strength.

12. What is the primary objective of the Fair Practices Code for NBFCs?

• A. Ensure transparency and fair treatment of customers
• B. Maximize NBFC profitability
• C. Avoid RBI supervision
• D. Increase the loan portfolio size

The Fair Practices Code is designed to ensure that NBFCs treat customers fairly, maintain transparency in lending, and follow ethical practices.

13. Which type of NBFCs require prior registration with RBI before availing bank finance?

• A. NBFCs only operating in microfinance
• B. All systemically important NBFCs
• C. NBFCs incorporated in special economic zones
• D. NBFCs under RBI exempted category

Banks provide finance only to NBFCs registered with RBI if they are systemically important. Non-registered NBFCs cannot access regulated bank funding.

14. Banks can provide finance to unregistered NBFCs under which condition?

• A. If NBFC is part of a bank group
• B. If NBFC is listed on stock exchange
• C. Only for non-systemic, exempted NBFCs and with RBI norms compliance
• D. Unconditionally, for any NBFC

Banks can finance unregistered NBFCs only if they are non-systemic and exempted under RBI norms, ensuring risk management and compliance.

15. Co-lending by banks and NBFCs aims to:

• A. Combine the strengths of banks and NBFCs to extend priority sector credit
• B. Allow NBFCs to replace banks in lending
• C. Avoid RBI prudential norms
• D. Reduce NBFC compliance requirements

Co-lending combines banks’ low-cost funds and NBFCs’ last-mile reach to effectively extend credit to priority sector borrowers.

16. In co-lending arrangements, the risk-sharing ratio between bank and NBFC is generally:

• A. 100% by NBFC
• B. As per RBI-approved agreement, usually majority by bank
• C. 100% by bank
• D. Not regulated

RBI guidelines specify that risk and interest should be shared between bank and NBFC as per the approved co-lending agreement, with banks typically taking a majority share.

17. Which NBFCs are mandated to adopt the Fair Practices Code?

• A. Only microfinance NBFCs
• B. Only NBFCs with asset size above ₹500 crore
• C. All NBFCs registered with RBI
• D. Only systemically important NBFCs

RBI mandates that all registered NBFCs adopt the Fair Practices Code to ensure ethical lending and customer protection.

18. What is the primary purpose of Financial Sector Legislative Reforms (FSLR)?

• A. To consolidate and simplify financial sector laws
• B. To privatize all public sector banks
• C. To increase NBFC lending limits only
• D. To replace RBI with a new regulator

The FSLR aims to consolidate, simplify, and modernize financial sector laws, reducing overlaps and enhancing regulatory clarity.

19. What is the main role of the Financial Stability and Development Council (FSDC)?

• A. Conduct day-to-day banking operations
• B. Maintain financial stability and coordinate regulatory policies
• C. Issue government securities
• D. Audit NBFC accounts

FSDC monitors and coordinates financial sector stability, systemic risks, and development, serving as a high-level policy forum.

20. Which of the following was a key recommendation of the Narasimham Committee I (1991)?

• A. Merge RBI with SEBI
• B. Privatize all NBFCs
• C. Strengthen prudential norms and improve banking efficiency
• D. Abolish priority sector lending

Narasimham Committee I recommended strengthening prudential norms, improving operational efficiency, and adopting international banking standards.

21. The Narasimham Committee II (1998) focused on which aspect of banking reforms?

• A. Only rural banking development
• B. Financial sector consolidation, capital adequacy, and risk management
• C. Abolishing RBI oversight
• D. Restricting bank lending to NBFCs

Narasimham Committee II emphasized strengthening capital adequacy, risk management, and overall banking sector consolidation.

22. Which body chairs the Financial Stability and Development Council (FSDC)?

• A. Union Finance Minister
• B. Governor of RBI
• C. SEBI Chairman
• D. Chairman of NABARD

The Union Finance Minister chairs the FSDC, while the RBI Governor acts as the vice-chair for operational coordination.

23. One of the key objectives of Narasimham Committee I was to:

• A. Introduce co-lending guidelines
• B. Abolish prudential norms
• C. Encourage healthy competition among banks
• D. Regulate insurance companies

The committee recommended creating an environment of healthy competition among banks to improve efficiency and service standards.

24. Which of the following was a key focus of banking sector reforms in India?

• A. Nationalization of all private NBFCs
• B. Strengthening prudential norms and operational efficiency
• C. Eliminating public sector banks
• D. Reducing bank branch network nationwide

Banking sector reforms aimed at improving efficiency, strengthening prudential norms, enhancing corporate governance, and promoting competition.

25. Which reform in monetary policy introduced the concept of operating targets for RBI?

• A. Nationalization of banks
• B. Priority Sector Lending norms
• C. Introduction of Liquidity Adjustment Facility (LAF)
• D. Introduction of co-lending by banks and NBFCs

LAF and operating targets were introduced to improve monetary policy transmission and manage liquidity in the banking system.

26. Reforms in financial markets aimed to:

• A. Enhance market efficiency, transparency, and investor protection
• B. Eliminate all private banks from markets
• C. Abolish RBI oversight of markets
• D. Restrict trading in government securities

Financial market reforms focused on increasing transparency, efficiency, and safeguarding investor interests through regulatory improvements and market development.

27. Which committee recommended deregulation of interest rates in India?

• A. Malegam Committee
• B. Narasimham Committee II
• C. RBI Monetary Policy Committee
• D. FSLR Committee

Narasimham Committee II recommended interest rate deregulation to improve banking efficiency and resource allocation.

28. Which of the following reforms helped in the development of the secondary market for government securities?

• A. Priority Sector Lending
• B. Co-lending by banks and NBFCs
• C. Introduction of Liquidity Adjustment Facility (LAF) and repo/reverse repo operations
• D. Capital adequacy norms for NBFCs

LAF and repo/reverse repo operations improved liquidity management and contributed to the development of a robust secondary market for government securities.

29. Which reform in monetary policy introduced the concept of base rate for banks?

• A. Bank Rate and Base Rate system reforms
• B. Priority Sector Lending reforms
• C. Co-lending reforms
• D. Financial Sector Legislative Reforms

The base rate system was introduced to ensure transparency in lending rates and improve transmission of policy rates to borrowers.

30. Which financial market reform aimed at improving efficiency of capital markets in India?

• A. Introducing co-lending guidelines
• B. SEBI reforms including dematerialization and electronic trading
• C. Introducing NBFC prudential norms
• D. Priority Sector Lending targets

Reforms by SEBI, including dematerialization of shares and electronic trading platforms, improved transparency, efficiency, and investor protection in capital markets.

31. One of the key objectives of reforms in the forex market in India is to:

• A. Enhance transparency, liquidity, and efficiency in forex transactions
• B. Restrict foreign exchange trading to banks only
• C. Abolish the role of RBI in forex management
• D. Fix exchange rates permanently

Forex market reforms aim to improve market transparency, liquidity, and efficiency, facilitating better management of foreign exchange risk and capital flows.

32. Which of the following is the primary purpose of the Financial Stability and Development Council (FSDC)?

• A. Conduct day-to-day banking operations
• B. Maintain financial stability and coordinate development of financial sector
• C. Issue government securities directly
• D. Audit public sector banks

FSDC serves as a high-level body for monitoring financial stability, systemic risks, and development of the financial sector in India.

33. Which of the following is a key function of FSDC?

• A. Conduct monetary policy operations
• B. Finance NBFC lending
• C. Monitor financial stability and systemic risks
• D. Issue currency notes

FSDC’s key function is to monitor financial stability, coordinate regulatory policies, and identify systemic risks to strengthen the financial system.

34. Which of the following is NOT a wing or mechanism under FSDC?

• A. Sub-Committee on Financial Stability
• B. Reserve Bank Currency Printing Wing
• C. Sub-Committee on Financial Literacy & Inclusion
• D. Technical Group on Financial Markets

The RBI’s currency printing function is separate and not part of FSDC. FSDC includes sub-committees and technical groups for stability, development, and literacy.

35. The technical groups under FSDC primarily deal with:

• A. Monitoring specific financial markets and systemic risk
• B. Auditing bank branches
• C. Issuing currency notes
• D. Conducting monetary policy independently

FSDC’s technical groups are specialized panels monitoring financial markets, systemic risks, and providing recommendations for regulatory actions.

36. Which reform helped in the development of the forex derivatives market in India?

• A. Priority Sector Lending guidelines
• B. Introduction of currency futures and options
• C. Basel III implementation
• D. Co-lending by banks and NBFCs

Introduction of currency futures and options enhanced liquidity, risk management, and hedging opportunities in the forex derivatives market.

37. Which of the following regulators coordinate through FSDC for financial stability?

• A. RBI, SEBI, IRDAI, PFRDA, and Ministry of Finance
• B. Only RBI and SEBI
• C. Only public sector banks
• D. Only NBFCs

FSDC coordinates among multiple regulators like RBI, SEBI, IRDAI, PFRDA, and Ministry of Finance to ensure systemic stability and development.

38. Which of the following is a measure adopted to improve transparency in the forex market?

• A. Mandatory priority sector lending in forex
• B. RBI deregulating bank branches
• C. Reporting of all forex transactions through authorized dealers
• D. Co-lending in forex markets

RBI mandates reporting of all forex transactions via authorized dealers to enhance transparency, monitoring, and systemic stability.

39. One of the wings of FSDC is the Sub-Committee on Financial Literacy & Inclusion. Its main function is to:

• A. Regulate co-lending agreements
• B. Promote financial literacy and inclusive growth
• C. Issue currency notes
• D. Set forex rates

The Sub-Committee on Financial Literacy & Inclusion focuses on promoting financial literacy, improving access to banking services, and fostering inclusive growth.

40. A bank wants to assess systemic risk in collaboration with NBFCs under FSDC guidelines. Which body or wing will provide guidance?

• A. SEBI Technical Committee
• B. Ministry of Corporate Affairs
• C. Sub-Committee on Financial Stability under FSDC
• D. RBI Currency Management Wing

The Sub-Committee on Financial Stability under FSDC monitors systemic risks and provides guidance to banks and NBFCs for risk mitigation and regulatory compliance.