Chapter 25 - Non Banking Financial Companies (JAIIB - MODULE C)

1. Which of the following activities is not allowed for a Non-Banking Financial Company (NBFC)?

• A. Providing loans and advances
• B. Leasing and hire-purchase
• C. Accepting demand deposits
• D. Investment in shares and debentures

NBFCs cannot accept demand deposits like banks. They can engage in lending, leasing, hire purchase, and investments.

2. In which decade did NBFCs start to gain significant importance in India?

• A. 1950s
• B. 1960s
• C. 1970s
• D. 1980s

NBFCs existed earlier but gained importance in the 1980s, providing credit to sectors underserved by banks.

3. NBFCs are regulated by:

• A. Reserve Bank of India
• B. Ministry of Finance
• C. NABARD
• D. SEBI

NBFCs are regulated by RBI under the RBI Act, 1934 (Chapter IIIB).

4. How do NBFCs contribute to financial inclusion in India?

• A. By providing only corporate loans
• B. By offering credit to underserved sectors like MSMEs, rural areas, and small borrowers
• C. By replacing commercial banks completely
• D. By accepting savings deposits from all customers

NBFCs support financial inclusion by providing credit to MSMEs, small borrowers, and rural customers who have limited access to formal banking.

5. Which was the first NBFC to be registered with RBI in India?

• A. Bajaj Finance Ltd.
• B. HDB Financial Services
• C. Muthoot Finance
• D. Sundaram Finance Ltd.

Sundaram Finance Ltd., established in 1954, was the first NBFC to be registered with the RBI.

6. Which of the following best describes the role of NBFCs in economic growth?

• A. Mobilizing savings and channeling them to unproductive sectors
• B. Competing with banks in deposit mobilization
• C. Providing only high-risk loans
• D. Bridging the credit gap by financing infrastructure, MSMEs, and rural customers

NBFCs are crucial in promoting inclusive growth by financing infrastructure, SMEs, and rural borrowers, thus complementing the role of banks.

7. Which regulator oversees the functioning of NBFCs in India?

• A. Reserve Bank of India (RBI)
• B. SEBI
• C. Ministry of Corporate Affairs
• D. IRDAI

NBFCs are primarily regulated by the RBI under the RBI Act, 1934, although specific NBFCs like housing finance companies may have dual oversight.

8. Which of the following is not a classification of NBFCs based on their activities?

• A. Asset Finance Company (AFC)
• B. Loan Company (LC)
• C. Commercial Bank
• D. Infrastructure Finance Company (IFC)

Commercial Banks are not NBFCs. NBFCs are classified into categories like AFC, LC, Investment Companies, Infrastructure Finance Companies, etc.

9. Which type of NBFC primarily focuses on financing infrastructure projects?

• A. Micro Finance Institution (MFI)
• B. Asset Finance Company (AFC)
• C. Core Investment Company (CIC)
• D. Infrastructure Finance Company (IFC)

Infrastructure Finance Companies (IFCs) provide long-term funding to infrastructure projects such as power, transport, and telecom.

10. RBI introduced a new regulatory framework for NBFCs in 2021. It is known as:

• A. BASEL III Framework
• B. Scale-Based Regulation (SBR)
• C. Priority Sector Lending Norms
• D. Liquidity Coverage Ratio

In 2021, RBI introduced the Scale-Based Regulation (SBR) framework, classifying NBFCs into layers (Base, Middle, Upper, Top) based on their size, activity, and risk profile.

11. Which of the following is a key element of RBI’s oversight on NBFCs?

• A. Maintaining minimum Tier-I capital
• B. Conducting periodic inspections
• C. Setting prudential norms for lending
• D. All of the above

RBI regulates NBFCs by prescribing capital adequacy, conducting inspections, monitoring asset quality, and setting prudential norms for lending and liquidity.

12. A Core Investment Company (CIC) is an NBFC which:

• A. Holds shares and securities mainly for investment in group companies
• B. Provides micro-loans to rural customers
• C. Finances automobiles and equipment
• D. Manages mutual funds and insurance

CICs are NBFCs that primarily invest in shares and securities of group companies rather than lending to the public directly.

13. Which of the following is classified as an NBFC-MFI (Microfinance Institution)?

• A. Provides only housing loans above ₹25 lakh
• B. Provides small loans to low-income households without collateral
• C. Primarily invests in group companies
• D. Deals in infrastructure bonds

NBFC-MFIs provide microcredit to low-income households, usually without collateral, to promote financial inclusion.

14. Which NBFC type focuses on providing housing finance to individuals and developers?

• A. Asset Finance Company (AFC)
• B. Loan Company (LC)
• C. Housing Finance Company (HFC)
• D. Core Investment Company (CIC)

Housing Finance Companies (HFCs) provide finance for housing projects and home loans; they are regulated by RBI (earlier by NHB).

15. Which of the following is included in “Owned Funds” of an NBFC?

• A. Paid-up equity capital, free reserves, and share premium
• B. Borrowings from banks
• C. Preference share capital (redeemable)
• D. Revaluation reserves

Owned Funds include paid-up equity capital, share premium, free reserves, and balance in P&L, but exclude revaluation reserves and redeemable preference shares.

16. Net Owned Funds (NOF) of an NBFC are calculated as:

• A. Paid-up equity + preference capital + borrowings
• B. Owned Funds – all liabilities
• C. Total assets – current liabilities
• D. Owned Funds – investments in group companies and subsidiaries

NOF = Owned Funds – (investments in group/subsidiaries + book value of debentures, bonds, outstanding loans to them).

17. What is the current minimum Net Owned Fund (NOF) requirement for NBFCs as per RBI?

• A. ₹1 crore
• B. ₹10 crore
• C. ₹25 crore
• D. ₹50 crore

RBI mandated that all NBFCs must maintain a minimum NOF of ₹10 crore (earlier it was ₹2 crore). This strengthens financial stability.

18. Why does RBI prescribe a minimum Net Owned Fund requirement for NBFCs?

• A. To ensure NBFCs operate with adequate capital and financial discipline
• B. To restrict competition with banks
• C. To ensure NBFCs operate with adequate capital and financial discipline
• D. To increase government revenue

RBI prescribes a minimum NOF to ensure NBFCs maintain financial strength, protect depositors, and operate with sound capital adequacy.

19. Which of the following is true regarding bank finance to NBFCs?

• A. Banks can extend loans and credit facilities to NBFCs, subject to RBI norms
• B. Banks cannot provide any finance to NBFCs
• C. Banks can only invest in the equity of NBFCs
• D. Banks can finance NBFCs without any regulatory restrictions

Banks are permitted to finance NBFCs under RBI guidelines. However, such exposures are subject to prudential limits and sector-specific restrictions.

20. Which of the following activities by banks is restricted while financing NBFCs?

• A. Term loans to NBFCs
• B. Working capital loans
• C. Financing NBFCs for lending against gold bullion
• D. Financing NBFCs engaged in hire-purchase

RBI prohibits banks from financing NBFCs that lend against gold bullion. Lending for gold jewelry loans is allowed under regulated conditions.

21. Which of the following is a key requirement of the Fair Practices Code (FPC) for NBFCs?

• A. Charging interest rates without disclosure
• B. Transparent disclosure of interest rates and terms to customers
• C. Avoiding written loan agreements
• D. Ignoring customer grievance redressal

NBFCs must follow RBI’s Fair Practices Code by transparently disclosing interest rates, loan terms, and ensuring a proper grievance redressal mechanism.

22. As per Fair Practices Code, NBFCs must communicate to borrowers in writing:

• A. Loan amount, tenure, and collateral only
• B. Loan amount and EMI but not charges
• C. Interest rate only
• D. Loan terms including interest, fees, charges, and repayment schedule

FPC requires NBFCs to provide written details of all terms including loan amount, interest rate, fees, charges, security, and repayment schedule.

23. The Ombudsman Scheme for NBFCs was introduced by RBI in:

• A. 2018
• B. 2015
• C. 2012
• D. 2020

RBI introduced the Ombudsman Scheme for NBFCs in 2018 to provide a grievance redressal mechanism for customers of deposit-taking NBFCs and larger non-deposit taking NBFCs.

24. Under the Ombudsman Scheme for NBFCs, customers can approach the Ombudsman if:

• A. NBFC provides extra loan facilities
• B. NBFC reduces interest rate voluntarily
• C. NBFC fails to provide proper loan documents or mis-sells products
• D. NBFC provides additional repayment holiday

Customers can complain to the NBFC Ombudsman if there is deficiency in service such as mis-selling, failure to provide documents, or unfair practices by NBFCs.

25. What is the primary objective of Scale Based Regulation (SBR) framework for NBFCs?

• A. To increase foreign investment in NBFCs
• B. To remove RBI’s regulatory control over NBFCs
• C. To strengthen regulation and supervision of NBFCs proportionate to their size, complexity, and risk profile
• D. To provide tax benefits to NBFCs

The SBR framework aims to strengthen regulation and supervision of NBFCs in proportion to their size, activity, and risk profile.

26. Under the SBR framework, how many layers of classification are there for NBFCs?

• A. Two layers
• B. Four layers
• C. Five layers
• D. Three layers

NBFCs are classified into four layers under SBR – Base Layer, Middle Layer, Upper Layer, and Top Layer (if identified).

27. Which NBFCs fall under the Base Layer in SBR framework?

• A. Large systemically important NBFCs
• B. NBFCs identified by RBI for additional monitoring
• C. Deposit-taking NBFCs
• D. Non-deposit taking NBFCs below asset size of ₹1,000 crore and not identified as risky

Base Layer NBFCs include smaller NBFCs (non-deposit taking) with asset size below ₹1,000 crore and not identified as systemically risky.

28. In SBR, which NBFCs are classified under the Upper Layer?

• A. Top 10 NBFCs in terms of asset size and those specifically identified by RBI
• B. Only NBFCs involved in microfinance activities
• C. All deposit-taking NBFCs
• D. Government-owned NBFCs only

The Upper Layer consists of the top 10 NBFCs in terms of asset size and any other NBFCs identified by RBI based on risk perception.

29. What is the significance of the 'Top Layer' under the SBR framework?

• A. All NBFCs automatically come under this layer
• B. It remains ideally empty, but RBI can move NBFCs from Upper Layer if it perceives substantial risks
• C. It consists of NBFCs with asset size below ₹500 crore
• D. It applies only to government-owned NBFCs

The Top Layer is ideally kept empty, but RBI can classify NBFCs into it if it observes extreme riskiness requiring higher regulation.

30. Under SBR, which regulatory framework is applicable to NBFCs in the Middle Layer?

• A. Only lighter regulation with no prudential norms
• B. No compliance with RBI guidelines
• C. Exempted from CRAR requirements
• D. Stricter regulatory requirements including governance standards, prudential norms, and exposure limits

Middle Layer NBFCs are subject to stricter regulations, including governance requirements, prudential norms, and restrictions on large exposures.