With reference to the Non-banking Financial Companies (NBFCs) in India, consider the following statements: 1. They cannot engage in the acquisition of securities issued by the government. 2. They cannot accept demand deposits like Savings Account. Which of the statements given above is/are correct? Select the correct answer.
Contents14
- A1 only
- B2 only
- CBoth 1 and 2
- DNeither 1 nor 2
Show answer
Answer: (B) 2 only
Explanation:
Statement 1 is not correct:
Non-banking Financial Companies (NBFCs) can engage in the acquisition of securities issued by the government.
However, there may be certain regulations and restrictions imposed by regulatory authorities regarding the type and extent of securities they can acquire.
Statement 2 is correct:
NBFCs cannot accept demand deposits like Savings Account.
Unlike banks, NBFCs do not hold a banking licence and are not authorised to accept demand deposits from the public.
They typically raise funds through various other means such as:
- issuing debentures
- accepting term deposits
- providing loans and advances.
NBFCs can invest in government securities but cannot accept demand deposits, which is the key difference from commercial banks.
UPSC is testing whether students understand the fundamental regulatory distinction between NBFCs and banks - NBFCs lack banking licenses and therefore cannot offer current/savings accounts to the public.
NBFC Definition & Core Features
Indian Economy Non-banking Financial Companies NBFCs
NBFCs: Definition, Registration & Key Characteristics
NBFCs are financial intermediaries that provide banking services without holding a banking licence
They cannot accept demand deposits (like savings accounts) from the public
RBI regulates NBFCs under RBI Act, 1934 with minimum capital of ₹2 crore
They can acquire government securities and participate in money markets
What are NBFCs?
NBFCs are companies that provide financial services similar to banks but operate without a banking licence. They bridge the gap between formal banking and public credit needs.
Registered under Companies Act, 2013
Regulated by RBI under Section 45-IA of RBI Act, 1934
Must have minimum Net Owned Fund of ₹2 crore
NBFC vs Bank Comparison
Feature | NBFCs | Banks |
|---|---|---|
Banking Licence | Not required | Required |
Demand Deposits | Cannot accept (savings, current) | Can accept |
Term Deposits | Can accept (with restrictions) | Can accept |
Government Securities | Can acquire | Can acquire |
Payment Systems | Cannot issue cheques | Can issue cheques |
Deposit Insurance | Not covered by DICGC | Covered by DICGC |
CRR/SLR | Not applicable | Mandatory |
Trap: Statement 1 says NBFCs cannot acquire government securities — this is false. They can participate in government bond markets.
Trap: Confusing 'demand deposits' with 'term deposits' — NBFCs can take term deposits but not demand deposits.
Memory Aid: NBFCs are 'almost banks' but no banking licence = no demand deposits.
NBFC Deposit Acceptance Rules
Indian Economy demand deposits Savings Account
NBFC Deposit Rules: What They Can & Cannot Accept
NBFCs cannot accept demand deposits — no savings accounts, current accounts, or cheque facilities
Only deposit-taking NBFCs can accept public deposits, subject to RBI guidelines
Term deposits allowed with minimum 12-month maturity and maximum 60-month
Why No Demand Deposits?
Demand deposits (savings, current accounts) can be withdrawn on demand and require sophisticated payment infrastructure. Since NBFCs lack banking licences, RBI prohibits them from accepting such deposits to maintain financial system stability.
NBFC Deposit Categories
Deposit Type | NBFCs Allowed? | Key Restrictions |
|---|---|---|
Demand Deposits | ❌ Prohibited | Includes savings, current accounts |
Term Deposits | ✅ Only deposit-taking NBFCs | 12-60 months maturity |
Public Deposits | ✅ With RBI approval | Minimum ₹25 crore Net Owned Fund |
Debentures | ✅ All NBFCs | Primary funding source |
Commercial Paper | ✅ All NBFCs | Short-term funding |
NBFC Funding Sources
# NBFC Funding
## Market Instruments
- Debentures
- Commercial Paper
- Bonds
- Inter-corporate deposits
## Bank Borrowings
- Term loans
- Working capital
- Foreign currency loans
## Public Deposits
- Only deposit-taking NBFCs
- 12-60 month maturity
- RBI guidelines applyTrap: 'Deposits' is a broad term — NBFCs can take term deposits but not demand deposits.
Trap: Not all NBFCs can take public deposits — only deposit-taking NBFCs with RBI permission.
Statement 2 is correct because demand deposits = savings accounts, which NBFCs cannot offer.
NBFC Investment Powers
Indian Economy acquisition of securities government
NBFC Investment Activities: Securities & Market Access
NBFCs can acquire government securities (G-Secs) and participate in bond markets
They can invest in corporate bonds, debentures, and equity subject to regulatory limits
No SLR requirement like banks, but prudential investment norms apply
Government Securities Access
Statement 1 is incorrect — NBFCs have full access to government securities markets. They can buy G-Secs, Treasury Bills, and State Development Loans through primary auctions and secondary markets, helping them manage liquidity and earn returns.
NBFC Investment Options
Investment Type | Allowed? | Key Features |
|---|---|---|
Government Securities | ✅ Yes | G-Secs, T-Bills, SDL — no restrictions |
Corporate Bonds | ✅ Yes | Subject to credit rating requirements |
Equity Shares | ✅ Yes | Prudential limits on single/group exposure |
Mutual Funds | ✅ Yes | Liquid funds for cash management |
Money Market | ✅ Yes | Commercial paper, CDs, repos |
Foreign Securities | Restricted | Only with RBI approval under LRS |
Investment Regulations
Single borrower limit: Maximum 15% of owned funds to one borrower
Group exposure limit: Maximum 25% of owned funds to one group
Liquid assets: Must maintain prescribed liquid assets for ALM
Credit rating: Investments in unrated securities heavily restricted
Real estate: Direct investment in land/building restricted (except own use)
Statement 1 trap: Says NBFCs 'cannot' acquire government securities — this is completely false.
Confusion: Don't mix up NBFCs with other entities that may have G-Sec restrictions.
UPSC loves: Testing what NBFCs cannot do vs what they can do — focus on deposit restrictions, not investment restrictions.
Types of NBFCs
Indian Economy
NBFC Classification: Types & Regulatory Framework
Deposit-taking NBFCs can accept public deposits; Non-deposit taking cannot
Systemically Important NBFCs (asset size ≥₹500 crore) have stricter regulations
Specialized NBFCs include housing finance, microfinance, and infrastructure companies
Major NBFC Categories
Type | Key Feature | Examples | Special Regulations |
|---|---|---|---|
Deposit-taking | Can accept public deposits | Bajaj Finance, Mahindra Finance | Stricter capital & liquidity norms |
Non-deposit taking | Cannot take public deposits | Most NBFCs | Lighter regulatory touch |
Systemically Important | Assets ≥₹500 crore | Large NBFCs | Bank-like regulations |
NBFC-MFI | Microfinance institutions | SKS Microfinance, Bandhan | Priority sector lending norms |
Housing Finance | Home loans focus | HDFC Ltd, LIC Housing | NHB regulation + RBI |
Infrastructure Finance | Infra projects only | IIFCL, PFC | Long-term project financing |
NBFC Registration Process
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**Company Incorporation**
Register under Companies Act with financial business objective`"]
s2["`**Capital Requirement**
Minimum Net Owned Fund of **₹2 crore**`"]
s3["`**RBI Application**
Apply for Certificate of Registration with required documents`"]
s4["`**RBI Verification**
RBI checks fit & proper criteria, business model`"]
s5["`**Registration Certificate**
RBI issues CoR — can commence NBFC business`"]
s1 --> s2
s2 --> s3
s3 --> s4
s4 --> s5Confusion: Not all NBFCs are the same — deposit-taking vs non-deposit taking have very different rules.
Systemically Important: Assets ≥₹500 crore, not based on deposit size or customer base.
Housing Finance Companies: Regulated by both NHB and RBI — dual regulation structure.