"Test: Non-Banking Financial Companies (NBFCs)" - UGC NET MCQ

The Assertion is true, as making false claims regarding regulation is indeed illegal.

The Reason is also true; such entities can face penalties under the Indian Penal Code.

The Reason provides a correct explanation for the Assertion, as it clarifies the legal implications of the actions mentioned. Thus, Option A is correct.

Non-Banking Financial Companies (NBFCs) are not permitted to issue cheques, as they are not part of the formal payment and settlement system like banks. This distinction means that while they can offer various financial services, they do not have the same capabilities as traditional banks, particularly in terms of deposit-taking and payment facilitation. An interesting fact is that NBFCs play a significant role in providing credit to underserved sectors of the economy, helping to bridge the gap in financial inclusion.

- The Assertion (A) is true as RBI regulations stipulate that IFCs must have a minimum net owned fund of ₹300 crore.

- The Reason (R) is also true since investing at least 75% of their assets in infrastructure loans is a requirement for IFCs.

- Furthermore, the reason directly supports the assertion by explaining a specific regulatory condition that aligns with the operational framework of IFCs. Therefore, Option A is correct.

A primary distinction is that banks can accept demand deposits, which are funds that can be withdrawn on demand, whereas NBFCs are prohibited from accepting such deposits. Additionally, depositors in banks are protected by the Deposit Insurance and Credit Guarantee Corporation, which is not the case for NBFC depositors. This difference emphasizes the regulatory framework that governs banks more strictly compared to NBFCs, reflecting their different roles in the financial system. A notable aspect is that despite these limitations, NBFCs contribute significantly to the economy by providing loans and financial services, particularly to individuals and businesses that may not qualify for traditional bank financing.

Statement 1 is correct because the Chit Funds Act, 1982, mandates that only registered chit funds can operate legally, ensuring oversight and regulation by state governments.

Statement 2 is incorrect, as Ponzi schemes do not involve genuine asset creation; they rely on the continuous recruitment of new members to pay returns to earlier investors without any actual investment or product sales.

Thus, the correct answer is Option A, as only Statement 1 is accurate.

A Non-Banking Financial Company (NBFC) is primarily involved in providing loans and advances as one of its core financial activities. Unlike traditional banks, NBFCs do not have the authority to accept demand deposits from the public. This distinction allows them to focus on financing, investments, and asset management. An interesting fact about NBFCs is that they play a critical role in the financial system, especially in providing credit to sectors that may be underserved by banks.

- Statement 1 is incorrect because the RBI does not guarantee the financial soundness of NBFCs or the repayment of deposits. This is an important precaution for depositors to understand, as it emphasizes the risks involved in investing with these companies.

- Statement 2 is correct because it is essential for depositors to verify that the NBFC displays its Certificate of Registration (CoR). This certificate confirms that the NBFC is authorized to accept deposits and is a crucial step in ensuring the legitimacy of the financial institution.

Thus, the correct answer is Option B: 2 Only.

A Residuary Non-Banking Company is specifically known for accepting deposits under various schemes, whether as lump sums or installments. This type of NBFC can be seen as a bridge between traditional banking services and non-banking financial services. An interesting aspect of Residuary Non-Banking Companies is that they often cater to customers seeking alternatives to conventional banks, providing additional avenues for savings and investment.

The Assertion is true; individuals can report illegal claims to the police or the nearest RBI office.

The Reason is false; the Reserve Bank does have the authority to handle complaints related to financial fraud.

Therefore, while the Assertion is correct, the Reason does not correctly explain it, making Option B the right choice.

- The Assertion (A) is true because NBFCs indeed provide various financial services that complement the banking sector, such as loans, leasing, and investment services.

- The Reason (R) is also true as NBFCs cannot accept demand deposits, which differentiates them from banks.

- However, while both statements are true, the reason does not explain why NBFCs are crucial to the financial system; it merely states a regulatory restriction. Thus, Option B is correct.