NBFCs and Microfinance Institutions: Rules and Types

The correct answer is B, section 45-IA. The section was inserted by the Reserve Bank of India (Amendment) Act of 1997 and requires an NBFC to hold a certificate of registration from the Reserve Bank and to maintain the prescribed minimum net owned fund before it can carry on business. Option A, section 42, deals with the cash reserve ratio that a scheduled bank must keep with the Reserve Bank, so it belongs to banks and not to NBFCs. Option C, section 22, is the licensing provision for banking companies, but it sits in the Banking Regulation Act of 1949 rather than in the Reserve Bank of India Act. Option D, section 35A, is the Reserve Bank's general power to issue directions to banking companies. The companion provision worth remembering is section 45-IB, which requires a deposit-taking NBFC to keep liquid assets.

The correct answer is B, accept demand deposits. An NBFC cannot accept demand deposits, cannot issue cheques drawn on itself, is not part of the payment and settlement system, and its depositors do not have the cover of the Deposit Insurance and Credit Guarantee Corporation. Those four points together are the difference between an NBFC and a bank. Option A is wrong as a choice because lending is the core activity of an NBFC and is written into its very definition. Option C is wrong for the same reason, since the acquisition of shares, debentures and other securities is one of the activities that defines the business. Option D is wrong because hire purchase is specifically named among the permitted activities, along with leasing, insurance business and chit business. A deposit-taking NBFC may accept term deposits, which is what makes this question worth reading twice.

The correct answer is A. The Reserve Bank uses what the industry calls the fifty-fifty test: both conditions must hold, so financial assets must be more than half of total assets and the income from those assets must be more than half of gross income. A company that meets only one of the two is not an NBFC. Option B is wrong because twenty-five per cent is not the threshold in either limb of the test. Option C is wrong on two counts: the figure is fifty and not seventy-five, and the income limb alone is never enough. Option D is wrong because incorporation under the Companies Act is a precondition for every company and says nothing about principal business; a manufacturer that parks money in securities is not an NBFC. The reason for the test is to separate a finance company from a trading, manufacturing or service company that also holds investments.

The correct answer is C, four. The layers are the Base Layer, the Middle Layer, the Upper Layer and the Top Layer, and the regulation becomes stricter as a company moves up, so that supervision matches the risk a company poses to the system. Option A, two, reflects the older division into deposit-taking and non-deposit-taking companies, which still exists but is not the layered framework. Option B, three, is the usual wrong answer, because candidates remember the base, middle and upper layers and forget the fourth. Option D, five, is simply wrong. The detail that completes the answer is that the Top Layer is kept empty by design and will be populated only if the Reserve Bank judges that a company in the Upper Layer has come to pose a substantial increase in systemic risk.

The correct answer is C, five hundred crore rupees and above. A non-deposit-taking NBFC of that size is classified as systemically important, written as NBFC-ND-SI, and becomes subject to prudential norms on capital adequacy, exposure and disclosure that smaller companies escape. Option A, one hundred crore, was never the threshold. Option B, two hundred and fifty crore, is an invented figure placed between the real ones. Option D, one thousand crore, is the strongest distractor because it is a real threshold in this topic, but a different one: under Scale Based Regulation a non-deposit-taking NBFC below one thousand crore rupees in assets generally sits in the Base Layer. Keep the two numbers apart as five hundred crore for systemic importance and one thousand crore for the boundary of the Base Layer.

The correct answer is B, the Malegam Committee. After the microfinance crisis in Andhra Pradesh in 2010, the Reserve Bank appointed a sub-committee of its central board under Y. H. Malegam to study the lending practices of microfinance institutions, and its report of January 2011 led to the NBFC-MFI being carved out as a distinct category with its own rules on margins, interest and recovery. Option A, the Narasimham Committee, reported on banking sector reform in 1991 and 1998 and has nothing to do with microfinance. Option C, the Nachiket Mor Committee of 2013, proposed comprehensive financial services for small businesses and low-income households and led towards small finance banks and payments banks, so it is a genuine distractor. Option D, the Raghuram Rajan Committee of 2008, reported on financial sector reforms more broadly.

The correct answer is C, three lakh rupees. The framework defines a microfinance loan by the borrower's household income rather than by the size of the loan or the kind of lender, and the same definition applies to a bank, a small finance bank, an NBFC and an NBFC-MFI alike, which was the main reform the framework brought. Option A, one lakh, and option B, two lakh, are the rural and urban limits of the older regime, which distinguished between the two and which the present framework replaced with a single figure. Option D, five lakh, is not a threshold in this framework at all. Two other numbers belong with this one: the monthly repayment obligations of a household may not exceed fifty per cent of its monthly household income, and an NBFC-MFI must hold at least seventy-five per cent of its total assets as microfinance loans.

The correct answer is C, fifty per cent. The cap covers the repayment of all loans of the household taken together, not only the microfinance loan being considered, and the lender must assess household income and existing debt before sanctioning, which is the framework's main protection against over-indebtedness. Option A, twenty-five per cent, is too low and is not used anywhere in the framework. Option B, forty per cent, is an invented figure that sounds plausible because lenders often use a similar ratio in retail lending practice. Option D, sixty per cent, is likewise wrong. Learn the three numbers of the framework as one set: three lakh rupees of annual household income to define a microfinance loan, fifty per cent of monthly income as the repayment cap, and seventy-five per cent of total assets as the minimum microfinance portfolio of an NBFC-MFI.

The correct answer is B, NABARD. The National Bank for Agriculture and Rural Development launched the programme as a pilot in 1992, connecting savings groups, mostly of women, directly to bank branches for credit, and by the number of households covered it became the largest microfinance programme in the world. Option A, SIDBI, the Small Industries Development Bank of India, supports small industry and refinances microfinance institutions, and MUDRA was set up as its subsidiary in April 2015, but the linkage programme is not its scheme. Option C, the Reserve Bank of India, supported the programme and issued the enabling instructions to banks, but it is the regulator and not the promoter. Option D, the State Bank of India, is a participating bank. NABARD itself was established in July 1982 under an Act of 1981.

The correct answer is A, the Grameen Bank of Bangladesh. Muhammad Yunus built the bank on the idea that very small loans without collateral, given mostly to women organised in groups that guarantee one another, are repaid reliably, and the Nobel Peace Prize of 2006 was awarded jointly to him and to the bank. Option B, Bank Rakyat of Indonesia, is a large state bank with a well-known microfinance arm but is not connected to the prize. Option C, BRAC, is also a Bangladeshi organisation working in microfinance and development, which makes it the closest distractor in the set. Option D, Bandhan Bank, is Indian: it began as a microfinance institution, received a universal banking licence and started operations in 2015, and it is the Indian parallel to the Grameen story rather than the answer here.