Test: NBFCs, Small Finance & Payment Banks - Banking Exams MCQ

• NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:
• NBFC cannot accept demand deposits; (The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and a maximum period of 60 months. They cannot accept deposits repayable on demand.) Hence, statement 2 is correct.
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself. Hence, statement 1 is correct.
• The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks. Hence, statement 3 is correct.

• NBFCs provide a range of financial services to their clients. Types of services under Non-Banking Financial services include the following : 
  • Hire purchase services
  • Leasing services
  • Housing finance services
  • Asset management services
  • Venture capital services
  • Mutual benefit finance services (Nidhi) banks.
• Since they perform the basic twin functions of attracting deposits from the public and are making loans, NBFCs are essentially banks, however, unlike commercial banks, they are not incorporated as a bank and are not governed by provisions of the Banking Regulation Act, 1949.
• The Reserve Bank of India is responsible for controlling the functioning of NBFCs.
• It is mandatory for an NBFC to get itself registered with the RBI as a deposit-taking company.
• For registration, they need to be a company (incorporated under the Companies Act, 1956) and should have a minimum NOF (Net Owned Fund) of rupees 2 crores.

A Non-Banking Financial Company (NBFC) is a company registered under Companies Act, 1956.

The types of NBFC’s classified by the reserve bank of India are:
(i) Asset Finance Company (AFC)
(ii) Investment Company (IC)
(iii) Loan Company (LC)
(iv) Infrastructure Finance Company (IFC)
(V) Systemically Important Core Investment Company (CIC-ND-SI)
(vi) Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)
(vii) Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)
(viii) Non-Banking Financial Company – Factors (NBFC-Factors)
(ix) Mortgage Guarantee Companies (MGC)
(x) NBFC- Non-Operative Financial Holding Company (NOFHC)

• Automated teller machines are electronic banking outlets that allow people to complete transactions without the help of a bank representative or teller.
• ATM transactions can be as simple as a deposit or balance inquiry, or more complex like a balance transfer or bill payment.
• In order to use an ATM, consumers need to have a debit or credit card, and a personal identification number.
• There are Different Types of ATM available which are as follows: –​
  

• Non-Banking Financial Companies (NBFCs) eligibility limit for debt recovery under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act 2002 has been reduced from Rs 500 crore to Rs 100 crore in asset size and Rs 1 crore to Rs 50 lakh in loan size.
• The Act allows lenders to auction properties of defaulters to recover their dues.
• The government has proposed to provide credit guarantee for the NBFC sector that has been facing liquidity crisis since the burst of the IL&FS (Infrastructure Leasing & Financial Services Limited is an Indian infrastructure development and finance company) scam.
• The Reserve Bank of India’s report on banking trends for 2018-19 showed the gross non-performing assets ratio of banks has increased to 6.1% of assets from 5.3 per cent in the last year.
• According to a note from rating agency Crisil, the reduction for applicability under Sarfaesi Act is a positive action and will bring an additional 12-15 per cent of NBFCs’ loan against property, which stands at around Rs 1 lakh crore as of March 2019, under the Sarfaesi act.

The appointment of a Banking Ombudsman is made for a period of not exceeding 3 years at a time. He is eligible for reappointment.

• The Reserve Bank of India (RBI) has introduced the prompt corrective action (PCA) framework for non-banking financial companies (NBFCs).
• The new NBFC framework will be applicable to all deposit-taking NBFCs in the middle, upper and top layers.
• The PCA framework for NBFCs will come into effect from October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022.

• NBFC’s lend and make investments and hence their activities are similar to that of banks; however there are a few differences as given below:
  • NBFC cannot accept demand deposits;
  • NBFCs do not form part of the payment and settlement system and hence cannot issue cheques
  • Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

A NBFC is usually regulated by Reserve Bank of India subject to some exemptions which are mentioned below.
There are various companies that are not regulated by RBI:

• Housing Finance Companies
• Merchant Banking Companies
• Stock Exchanges
• Companies engaged in the business of stock-broking/sub-broking
• Venture Capital Fund Companies
• Nidhi Companies
• Insurance companies and
• Chit Fund Companies

These all are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.

• Housing Finance Companies are regulated by National Housing Bank
• Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India
• Insurance companies are regulated by Insurance Regulatory and Development Authority
• Chit Fund Companies are regulated by the respective State Governments
• Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India.

Companies that do financial business but are regulated by other regulators are given specific exemption by the Reserve Bank from its regulatory requirements for avoiding duality of regulation.