CAIIB BRBL Module A UNIT 6 MCQ – NON-BANKING FINANCIAL COMPANIES (NBFCs)

Correct Answer: B. Non-Banking Financial Company (NBFC). An NBFC is specifically defined as a company involved in financial activities like loans, advances, acquisition of securities, leasing, hire-purchase, insurance, and chit funds, registered under the Companies Act.

Correct Answer: C. Purchase or sale of agricultural goods. The definition of an NBFC explicitly excludes institutions whose main business involves agricultural activity, industrial activity, trading of goods (other than securities), or construction/sale of immovable property.

Correct Answer: C. Department of Non-Banking Supervision (DNBS). The DNBS of the RBI is explicitly mentioned as being entrusted with the regulation and supervision of NBFCs under the relevant chapters of the RBI Act, 1934.

Correct Answer: B. Depositor protection, consumer protection, and financial stability. These three aspects are identified as the primary focus points for the regulatory oversight of NBFCs by the RBI.

Correct Answer: C. Cancelling its Certificate of Registration. The RBI is empowered to take punitive measures such as cancelling the Certificate of Registration, prohibiting deposit acceptance, filing criminal cases, or initiating winding-up proceedings.

Correct Answer: C. Owing to the growth, systemic significance, and changing risk profile of NBFCs. The increasing size, complexity, interconnectedness, and systemic importance of NBFCs necessitated an alignment of the regulatory framework with their evolving risk profile.

Correct Answer: B. Small ticket personal loans, vehicle financing, and MSME loans. NBFCs historically cater to segments like small personal loans, financing for various vehicles (including used ones), farm equipment, and providing innovative financial solutions for MSMEs.

Correct Answer: C. Simpler processes, timely disbursement, and flexible repayment terms. NBFCs are often characterized by simpler credit sanction and disbursement procedures, along with timely, friendly, and flexible repayment options tailored to their clients, even if the cost is higher.

Correct Answer: C. By catering to the diverse financial needs of customers often excluded by banks. NBFCs play a significant role in inclusive growth by reaching out to and serving the financial requirements of customers who may not have access to traditional banking services.

Correct Answer: C. They provide basic financial services like small loans and savings to the poor. NBFC-MFIs focus on giving poor people access to essential financial services, including loans, savings, money transfers, and micro-insurance, bridging the gap left by commercial banks and money lenders.

Correct Answer: C. Customer-friendly approaches like simplified procedures and quick disbursement. The phenomenal growth in NBFC gold loans is attributed to their customer-centric methods, including simplified sanction processes and fast loan disbursal.

Correct Answer: C. Financing of used or second-hand vehicles. It is noted that, typically in India, NBFCs are the primary financiers for second-hand vehicles, a market segment popular among self-employed transport operators.

Correct Answer: B. By offering easier Know-Your-Customer (KYC) norms and relaxing documentation needs. NBFCs contribute to affordable housing by extending small-ticket loans and simplifying access for low-income borrowers through easier KYC norms and reduced documentation requirements.

Correct Answer: C. By mobilizing resources and converting savings into investments. NBFCs contribute to economic development by mobilizing savings from the public and channeling them into productive investments, thus aiding capital formation.

Correct Answer: C. Aiding capital formation by helping increase the capital stock of companies. NBFCs play a role in economic development by assisting in capital formation, which involves increasing the capital stock (like machinery, equipment) used by companies.

Correct Answer: C. Registration with the Reserve Bank of India (RBI). Section 45-IA explicitly states that it is mandatory for every NBFC to be registered with the RBI to operate as a non-banking financial institution.

Correct Answer: B. Obtaining an RBI certificate of registration and possessing the specified minimum net owned fund. Section 45-IA(1) mandates both obtaining a certificate of registration from RBI and having the required net owned fund.

Correct Answer: B. ₹25 lakh, RBI can specify a different amount up to ₹100 crore. The section specifies ₹25 lakh initially, but grants RBI the power to notify different amounts, up to a maximum of ₹100 crore, for different NBFC categories.

Correct Answer: B. To avoid dual regulation as they are already regulated by other authorities. The exemption is provided to obviate dual regulation for entities that fall under the purview of other specific regulators like SEBI, IRDA, or the National Housing Bank.

Correct Answer: C. Venture Capital Fund / Merchant Banking / Stock broking companies. Companies such as Venture Capital Funds, Merchant Banking companies, and Stock broking companies registered with SEBI are exempt from RBI registration to avoid dual regulation.

Correct Answer: C. Insurance Regulatory and Development Authority (IRDA). Insurance companies regulated and registered by IRDA are exempt from RBI’s NBFC registration requirements.

Correct Answer: C. National Housing Bank (NHB). Housing Finance Companies fall under the regulatory purview of the National Housing Bank and are therefore exempt from RBI registration.

Correct Answer: B. Nidhi companies, Chit companies, Stock Exchanges, and Mutual Benefit companies. These specific categories of institutions are also exempt from RBI’s NBFC registration requirements, often due to specific legislation or regulatory structures governing them.

Correct Answer: C. NBFC-Systemically Important Non-Deposit taking Companies (NBFC-ND-SI) and Deposit taking NBFCs (NBFC-D). The 2016 Master Direction targeted these specific categories, indicating a focus on systemically important and deposit-taking entities.

Correct Answer: C. ₹500 crore. NBFC-Factors registered under the Act become subject to these specific guidelines if their asset size is ₹500 crore or more.

Correct Answer: C. ₹300 crore. An IDF-NBFC is required to have a Net Owned Fund of ₹300 crore or more.

Correct Answer: C. Public Private Partnerships (PPP) and post-commercial operation date (COD) projects with at least one year of satisfactory operation. IDF-NBFCs have a specific mandate to invest only in PPP and post-COD infrastructure projects that meet the operational criteria.

Correct Answer: C. A Tripartite Agreement. Becoming a party to a Tripartite Agreement is a specified condition for IDF-NBFCs.

Correct Answer: C. ₹5 crore. Generally, NBFC-MFIs are required to maintain a minimum NOF of ₹5 crore.

Correct Answer: B. ₹2 crore. A lower minimum NOF requirement of ₹2 crore is applicable for NBFC-MFIs registered in the North Eastern Region.

Correct Answer: C. 75 per cent. A key qualifying criterion for an NBFC-MFI is that not less than 75 per cent of its total assets should consist of microfinance loans.

Correct Answer: C. ₹500 crore. The specific guidelines discussed apply to NBFC-MFIs with an asset size of ₹500 crore and above.

Correct Answer: C. ₹500 crore. Similar to NBFC-MFIs mentioned, the guidelines apply to NBFC-IFCs with an asset size of ₹500 crore and above.

Correct Answer: C. 75 per cent. An NBFC-IFC must have deployed at least 75 per cent of its total assets in infrastructure loans.

Correct Answer: C. ₹300 crore. NBFC-IFCs are required to have minimum Net Owned Funds of ₹300 crore or above.

Correct Answer: B. ‘A’. An NBFC-IFC must possess a minimum credit rating of ‘A’ from a recognised credit rating agency.

Correct Answer: B. CRAR of 15 per cent with minimum Tier I of 10 per cent. An NBFC-IFC needs to maintain a CRAR of 15 per cent, ensuring that the Tier I capital component is at least 10 per cent.

Correct Answer: C. Two hundred lakh rupees (₹2 crore). The RBI has generally specified ₹2 crore as the required NOF for an NBFC to operate, unless specific norms dictate otherwise for its category.

Correct Answer: C. 15 per cent. Applicable NBFCs are required to maintain a minimum total capital ratio (Tier I + Tier II) of not less than 15 per cent of their risk-weighted assets.

Correct Answer: C. 12 per cent. NBFCs predominantly engaged in gold loans (50% or more of financial assets) must maintain a higher minimum Tier I capital of 12 per cent.

Correct Answer: C. Size, activity, and perceived riskiness. The revised structure categorizes NBFCs into four layers based on their asset size, the nature of their activities, and the level of risk they are perceived to pose.

Correct Answer: D. Base Layer, Middle Layer, Upper Layer, Top Layer. The four tiers defined in the structure are Base Layer (BL), Middle Layer (ML), Upper Layer (UL), and Top Layer (TL).

Correct Answer: C. Non-deposit taking NBFCs with asset size below ₹1000 crore. The Base Layer includes non-deposit taking NBFCs whose asset size is less than ₹1000 crore.

Correct Answer: B. NBFC-Peer to Peer Lending Platform (NBFC-P2P), NBFC-Account Aggregator (NBFC-AA), and Non-Operative Financial Holding Company (NOFHC). These specific types of NBFCs are categorized under the Base Layer.

Correct Answer: B. Not availing public funds and not having any customer interface. NBFCs that neither access public funds nor interact with customers for their business are placed in the Base Layer.

Correct Answer: C. Funds from public deposits, inter-corporate deposits, bank finance, Commercial Papers, debentures, etc. ‘Public funds’ encompass various sources, excluding certain compulsorily convertible instruments.

Correct Answer: B. Interaction between the NBFC and its customers while carrying on its business. Customer interface specifically refers to the direct interaction between the NBFC and its clientele during business operations.

Correct Answer: B. All deposit taking NBFCs (NBFC-Ds). Deposit taking NBFCs, regardless of their size, are classified under the Middle Layer.

Correct Answer: C. ₹1000 crore and above. Non-deposit taking NBFCs with assets amounting to ₹1000 crore or more fall into the Middle Layer.

Correct Answer: B. SPDs, IDF-NBFCs, CICs, HFCs, and NBFC-IFCs. Standalone Primary Dealers, Infrastructure Debt Funds, Core Investment Companies, Housing Finance Companies, and Infrastructure Finance Companies are placed in the Middle Layer.

Correct Answer: C. Specific identification by the RBI based on parameters and scoring methodology indicating enhanced regulatory need. The RBI uses a set of parameters and a scoring system to identify NBFCs requiring enhanced regulation for the Upper Layer.

Correct Answer: B. The top ten eligible NBFCs based on asset size. Irrespective of other factors, the ten largest NBFCs (by asset size) are automatically placed in the Upper Layer.

Correct Answer: B. If the RBI perceives a substantial increase in potential systemic risk from that specific NBFC. Movement to the Top Layer occurs if the RBI identifies a significant rise in systemic risk emanating from an NBFC currently in the Upper Layer.

Correct Answer: C. It ideally remains empty. The Top Layer is designed to be populated only under exceptional circumstances when specific Upper Layer NBFCs pose heightened systemic risk.

Correct Answer: C. NBFC-BL (Base Layer). Under the new system, references to the older category NBFC-ND correspond to NBFC-BL.

Correct Answer: D. NBFC-ML or NBFC-UL. The former NBFC-D and NBFC-ND-SI categories are now mapped to either the Middle Layer (NBFC-ML) or the Upper Layer (NBFC-UL) based on applicable criteria.

Correct Answer: C. NBFC-BL. Existing NBFC-ND-SIs in this specific asset size bracket, unless required to be in the Middle Layer for other reasons, became NBFC-BL.

Correct Answer: C. 2. Both NBFC-P2P and NBFC-AA are required to maintain an NOF of ₹2 crore, with no scheduled increase by 2027.

Correct Answer: B. 20. Housing Finance Companies are required to maintain an NOF of ₹20 crore by the specified deadline.

Correct Answer: D. 10. ICCs are mandated to increase their NOF in phases, reaching ₹10 crore by March 31, 2027.

Correct Answer: C. 10. MFIs (outside the NE region) must increase their NOF to ₹10 crore by March 31, 2027.

Correct Answer: C. 10. Similar to ICCs and MFIs, NBFC-Factors are required to achieve an NOF of ₹10 crore by March 31, 2027.

Correct Answer: D. 0.25 per cent. NBFC-UL must maintain a standard asset provision of 0.25 per cent for these specific loan categories.

Correct Answer: D. 1.00 per cent. Advances to the CRE sector (other than CRE-RH) require a standard asset provision of 1.00 per cent for NBFC-UL.

Correct Answer: B. 0.40 per cent. A general rate of 0.40 per cent applies to standard assets in categories not specifically mentioned otherwise, including loans to Medium Enterprises.

Correct Answer: C. Yes, at the rate applicable to standard loan assets of the concerned counterparty. Exposures from permitted derivative transactions are subject to the same standard asset provisioning as applicable to the counterparty’s loan assets.

Correct Answer: C. More than 90 days overdue. The standard NPA classification norm has been changed to recognise an asset as non-performing if it is overdue for more than 90 days.

Correct Answer: C. March 31, 2026. A glide path is provided for Base Layer NBFCs, with the final deadline to adopt the 90-day NPA norm being March 31, 2026.

Correct Answer: C. At least one director must have relevant experience from working in a bank or NBFC. To ensure professional management, it’s required that at least one director possesses relevant prior experience in the banking or NBFC sector.

Correct Answer: C. ₹1 crore. A ceiling of ₹1 crore per borrower is set for financing IPO subscriptions, although NBFCs are permitted to set lower, more conservative limits.

Correct Answer: B. To make a thorough internal assessment of the capital needed in relation to business risks. ICAAP requires these NBFCs to internally evaluate their capital requirements commensurate with the risks inherent in their operations.

Correct Answer: C. Credit risk, market risk, operational risk, and all other residual risks. The internal capital assessment under ICAAP must comprehensively cover credit, market, operational, and any other remaining risks.

Correct Answer: B. It should be proportionate to the scale and complexity of the NBFC’s operations, as per its Board-approved policy. The methodology is to be developed internally, approved by the Board, and tailored to the specific scale and complexity of the NBFC.

Correct Answer: C. To ensure adequate capital is available to support all business risks and encourage better internal risk management. ICAAP aims to ensure capital adequacy for all risks and promote the use of improved internal risk management techniques.

Correct Answer: B. 9 per cent. To enhance regulatory capital quality, NBFC-UL are required to maintain a minimum CET1 capital of 9 per cent of their Risk Weighted Assets.

Correct Answer: C. To ensure their growth is supported by adequate capital. The leverage requirement acts as an additional check to ensure that the growth of NBFC-UL is backed by sufficient capital, complementing the CRAR.

Correct Answer: C. They are required to hold differential provisioning towards different classes of standard assets. NBFC-UL must apply different provisioning rates based on the specific class or category of the standard asset.

Correct Answer: C. 25% of Tier 1 Capital. The separate limits for lending and investments have been merged into a single exposure limit of 25% of the NBFC’s Tier 1 Capital for a single borrower/party.

Correct Answer: D. 40% of Tier 1 Capital. For a single group of borrowers/parties, the merged exposure limit is set at 40% of the NBFC’s Tier 1 Capital.

Correct Answer: C. Tier 1 Capital. The revised concentration limits (for single borrower/party and single group) are calculated with reference to the NBFC’s Tier 1 Capital, replacing the previous reference to Owned Fund.

Correct Answer: B. If the investment is in the equity capital of an insurance company, specifically permitted in writing by the RBI. Investments in the equity of insurance companies are exempt from the ceiling up to the extent specifically allowed by RBI in writing.

Correct Answer: B. If the additional exposure (5% for single party, 10% for group) is due to infrastructure loans and/or investments. Exceeding the norms is allowed if the extra exposure arises from financing or investing in infrastructure.

Correct Answer: C. Investments in or loans to subsidiaries/group companies, to the extent already reduced from Owned Funds for NOF calculation. Such exposures that have already been deducted for NOF computation are excluded from concentration limit calculations.

Correct Answer: B. 10 per cent and 15 per cent. IFCs have higher specific limits for lending: they can exceed norms by 10% of owned funds for a single borrower and 15% for a single group.

Correct Answer: A. 5 per cent and 10 per cent. For combined lending and investment, IFCs can exceed norms by 5% of owned funds for a single party and 10% for a single group.

Correct Answer: B. NBFCs not accessing public funds in India and not issuing guarantees. The concentration norms do not apply to NBFCs that do not use public funds (directly or indirectly) and do not issue guarantees.

Correct Answer: C. No exposure (credit or investment) is allowed to promoters, promoter group entities, individuals associated with them, or the NOFHC itself. There is a strict prohibition on such exposures for NBFCs held by an NOFHC.

Correct Answer: C. Capital market (direct and indirect) and Commercial Real Estate. Exposures to the capital market and commercial real estate are defined as Sensitive Sector Exposures for NBFCs.

Correct Answer: C. Fix Board-approved internal limits separately for capital market and commercial real estate exposures. NBFCs must establish internal, board-approved limits for SSE, differentiating between capital market and commercial real estate exposures.

Correct Answer: C. They must determine internal limits for other important sectors and maintain a Board-approved limit for exposure to the NBFC sector itself. In addition to SSE limits, NBFC-UL must set internal limits for other key sectors and specifically for exposures to the NBFC sector.

Correct Answer: C. Evaluating the overall risks faced by the NBFC, including liquidity risk, and reporting to the Board. The RMC is responsible for the overall evaluation of risks, specifically including liquidity risk, and must report its findings to the Board of Directors.

Correct Answer: C. They must have a Board-approved policy governing such loans. NBFC-BL are mandated to establish a policy, approved by their Board, concerning the granting of loans to directors, senior officers, their relatives, and related entities.

Correct Answer: B. They cannot hold any office (including directorships) in any other NBFC-ML or NBFC-UL, except for directorship in a subsidiary. KMP of NBFC-ML/UL are restricted from holding positions in other NBFCs within the same layers, with an exception for subsidiary directorships.

Correct Answer: B. Yes, they can assume directorship in NBFC-BLs. It is explicitly clarified that KMP from NBFC-ML/UL are allowed to hold directorships in NBFCs belonging to the Base Layer.

Correct Answer: C. Three. An independent director is restricted from being on the Board of more than three NBFCs (NBFC-ML or NBFC-UL) at the same time.

Correct Answer: B. To ensure there is no conflict arising from such simultaneous appointments. The NBFC’s Board must ensure that no conflict of interest occurs due to its independent directors serving on the boards of other NBFCs concurrently.

Correct Answer: C. A Corporate Governance report detailing director composition, categories, non-executive director shareholding, etc. A specific Corporate Governance report with details on directors and their shareholdings is a required disclosure.

Correct Answer: B. Disclosure of the modified opinion, its impact on financial items, and management’s views on the qualifications. Detailed disclosure is required covering the opinion, its financial impact, and the management’s response.

Correct Answer: C. Disclosure of breaches in loan covenants or terms of debt securities, including any instances of default. Any breach of covenants related to loans availed or debt issued, including defaults, must be disclosed.

Correct Answer: B. Appointment of a Chief Compliance Officer (CCO). NBFCs are required to appoint a CCO, who must be sufficiently senior, to foster an effective compliance function.

Correct Answer: C. To promote a better compliance culture within the organization. The policy aims to clarify the CCO’s role and responsibilities to foster an improved organisational culture regarding compliance.

Correct Answer: C. To address issues of excessive risk-taking potentially caused by misaligned compensation packages. The requirement aims to prevent compensation structures that might inadvertently encourage excessive risk-taking.

Correct Answer: B. Constitution of a Remuneration Committee and principles for fixed/variable pay. The policy must, at a minimum, include the formation of a Remuneration Committee and establish principles governing fixed and variable pay components.

Correct Answer: C. To delineate the role of each committee and lay down a calendar of reviews. The Board must clearly define the functions of its committees and establish a schedule for their reviews.

Correct Answer: C. A whistle-blower mechanism to report genuine concerns. NBFCs must establish a formal channel for directors and employees to raise genuine concerns confidentially.

Correct Answer: B. The Board must ensure good corporate governance practices are followed in the subsidiaries. The parent NBFC’s Board is responsible for ensuring sound governance practices extend to its subsidiary companies.

Correct Answer: C. NBFCs with 10 or more branches. The mandate to adopt CBS applies to NBFCs that operate 10 or more branches.

Correct Answer: C. In the vernacular language or a language understood by the borrower. Communication must be in a language that the borrower can comprehend, which could be the local vernacular language.

Correct Answer: B. Necessary information affecting the borrower’s interest to allow comparison and informed decisions, and required documents. Forms must contain key information relevant to the borrower’s decision-making process and specify the documents needed.

Correct Answer: C. A system for giving acknowledgement for receipt of all loan applications, preferably indicating disposal time frame. NBFCs must acknowledge receipt of applications and should ideally inform the applicant about the expected processing time.

Correct Answer: B. Investments classified as ‘current assets’ in the balance sheet and intended to be held for less than one year. ‘Current investments’ are those shown as current assets and expected to be held for under a year.

Correct Answer: B. A loan provided without any tangible asset as security. An unsecured loan is defined as one that is not backed by any tangible collateral.

Correct Answer: B. Based on usual factors like credit purpose, asset quality, repayment capacity, risk perception etc. Banks should use standard credit appraisal factors for lending decisions concerning these NBFCs.

Correct Answer: C. The ceiling linked to NOF has been withdrawn. For these specific categories of RBI-registered NBFCs, the earlier bank credit ceiling tied to their NOF has been removed.

Correct Answer: B. Yes, banks may extend finance against such second-hand assets financed by NBFCs. Banks are allowed to finance NBFCs based on the second-hand assets they have funded.

Correct Answer: B. Bank finance is restricted to the extent of their Net Owned Fund (NOF). For registered RNBCs, bank finance is capped at the level of their NOF as defined in the RBI Act.

Correct Answer: B. If the bills arise from the sale of commercial vehicles or two/three-wheelers, subject to conditions. There is an exception allowing rediscounting for bills related to the sale of these specific types of vehicles, provided certain conditions are met.

Correct Answer: C. The bills must have been drawn by the manufacturer on the dealer only. A specific condition for eligibility is that the original bill must be drawn by the vehicle manufacturer directly on the dealer.

Correct Answer: C. Investments (both current and long-term) in shares, debentures, etc., of any company/entity (with an exception for stock brokers’ stock-in-trade). Bank credit is generally not available for financing NBFC investments in shares/debentures, except for stock held as inventory by stockbroking companies.

Correct Answer: C. No, this activity is not eligible for bank credit. Providing finance to NBFCs for the specific purpose of on-lending to individuals for IPO subscriptions or secondary market share purchases is ineligible for bank credit.