The regulatory framework that created the NBFC-MFI as a separate category followed the report of which committee?

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.