Test: Non-Banking System - Bank Exams MCQ

NBFCs are prohibited from accepting demand deposits, which are funds that can be withdrawn at any time. This restriction is in place to maintain the stability and integrity of the non-banking financial sector.

A company wishing to operate as a non-banking financial institution must comply with the Companies Act, 1956, ensuring that it meets legal and regulatory requirements for corporate governance and financial operations.

The primary function of NBFCs is to lend and make investments, which makes their activities similar to those of banks. However, they do not offer the full range of services provided by banks, such as accepting demand deposits.

Unlike banks, NBFCs cannot accept demand deposits, meaning they cannot hold funds that depositors can withdraw at any time. This limitation differentiates NBFCs significantly from traditional banks.

An NBFC can accept public deposits for a maximum period of 5 years (60 months). This allows depositors to choose a term that suits their financial planning needs.

To be registered as an NBFC, the company must meet a minimum net owned fund requirement of Rs 200 lakhs. This requirement ensures that the company has adequate financial resources to engage in non-banking financial activities responsibly.

If an NBFC's application for the authorization certificate to accept deposits is rejected, it cannot accept fresh deposits or renew existing ones. This regulation is critical for maintaining the integrity of the financial system and protecting depositors.

The Reserve Bank of India (RBI) plays a crucial role in authorizing and regulating the operations of NBFCs. This oversight is vital for maintaining financial stability and ensuring that NBFCs operate within a safe and sound framework.

NBFCs do not form part of the payment and settlement system, which is a fundamental difference from banks. This means they cannot offer the same transaction capabilities, such as check issuance or payment processing, that banks provide.

The operation of NBFCs in India is primarily governed by the Reserve Bank of India Act, 1934. This act outlines the legal framework and regulatory requirements for non-banking financial institutions.

One of the main distinctions between banks and NBFCs is that NBFCs cannot accept demand deposits. This difference is fundamental to their operational model and affects how they manage liquidity and customer relationships.

The minimum capital requirement for establishing an NBFC is Rs 100 crores. This requirement is designed to ensure that the company has sufficient financial resources to operate effectively in the financial market.

The maximum interest rate that NBFCs can offer on deposits is 12.5%. This ceiling is set to ensure that the interest rates remain competitive while protecting investors from excessive risk.

An NBFC must be registered with the Reserve Bank of India (RBI) and possess a certificate of authorization to accept deposits from the public. This regulatory requirement ensures that the company meets certain standards of financial stability and governance.

NBFCs are allowed to compound interest on deposits at intervals not shorter than monthly. This compounding structure can benefit depositors, as it allows for the accumulation of interest more frequently than longer intervals.

NBFCs can accept or renew public deposits for a minimum period of 12 months and a maximum period of 60 months. This structure allows for some flexibility in deposit terms while ensuring a longer-term commitment from depositors.

A significant risk for depositors in NBFCs is the lack of deposit insurance. Unlike banks, where deposits are typically insured, NBFCs do not provide this safety net, which can expose depositors to higher financial risks.

NBFCs cannot accept demand deposits, which are those that can be withdrawn at any time. This limitation helps to differentiate their operations from those of traditional banks.

Deposits with NBFCs are not insured, which means depositors do not have the same protections as they would in a bank, where deposits are typically insured by the Deposit Insurance and Credit Guarantee Corporation. This lack of insurance makes it crucial for depositors to assess the risk before investing.

The Reserve Bank of India (RBI) is the regulatory body that must authorize an NBFC to accept public deposits. This oversight helps to ensure that the financial practices of NBFCs align with national standards and regulations.