Question — Q.99
Consider the following statements about the Non-Banking Financial Companies (NBFCs) in India:
1NBFCs cannot accept demand deposits.
2All the NBFCs operating in India have to be registered with the RBI.
3NBFCs form part of the payment and settlement system and can issue cheque drawn on itself.
4Deposit insurance facility of DICGC is not available to the depositors of deposit taking NBFCs.
A1 and 4 ✓
B1, 2 and 3
C4 only
D2, 3 and 4
Each Statement — RBI Framework for NBFCs
1
✓ Correct — NBFCs cannot accept demand deposits
NBFCs cannot accept demand deposits
Correct. This is one of the three fundamental distinctions between banks and NBFCs as defined by RBI:• Demand deposits = deposits repayable on demand by the depositor (savings accounts, current accounts, demand drafts)
• NBFCs cannot accept demand deposits
• NBFCs can accept term deposits (fixed deposits with a fixed tenure) — but only deposit-taking NBFCs (NBFC-D) registered with RBI can do so
This restriction exists because demand deposits create systemic liquidity risk — only banks, which are subject to CRR/SLR requirements and full RBI prudential supervision, are permitted to accept them.
✓ NBFCs CANNOT accept demand deposits · CAN accept term deposits (only NBFC-D category)
Demand deposits = savings/current accounts = bank-only · Term deposits = fixed deposits = permitted for deposit-taking NBFCs · This is one of 3 key NBFC vs bank distinctions per RBI
2
✗ Wrong — NOT all NBFCs need RBI registration
All the NBFCs operating in India have to be registered with the RBI
Wrong — the word “ALL” makes this incorrect. RBI registration requirement for NBFCs:• NBFCs with asset size ≥ ₹10 crore must compulsorily register with RBI
• NBFCs with asset size below ₹10 crore are exempt from RBI registration
Additionally, certain NBFC-like entities are regulated by other bodies and do NOT register with RBI:
• Nidhi companies → regulated by Ministry of Corporate Affairs
• Chit Fund companies → regulated by respective State Governments
• Insurance companies → regulated by IRDAI
• Merchant Banking / Stock Broking companies → regulated by SEBI
The statement is wrong because it uses the absolute “ALL” — which is too broad.
✗ Only NBFCs with assets ≥ ₹10 crore need RBI registration · Nidhi/Chit Fund/Insurance = other regulators
Nidhi → MCA · Chit Funds → State Govts · Insurance → IRDAI · Stock Broking → SEBI · Small NBFCs (<₹10 cr) → exempt from RBI registration
3
✗ Wrong — NBFCs are NOT part of payment & settlement system
NBFCs form part of the payment and settlement system and can issue cheque drawn on itself
Completely wrong — both parts are incorrect.Part 1: Payment and Settlement System
NBFCs do NOT form part of the payment and settlement system. The payment and settlement system in India is governed by the Payment and Settlement Systems Act, 2007, and operates through RBI. Only banks (scheduled commercial banks) participate in the core payment and settlement infrastructure (RTGS, NEFT, cheque clearing through NPCI/RBI). NBFCs are excluded from this system.
Part 2: Cannot issue cheques drawn on itself
NBFCs cannot issue cheques drawn on themselves. Only banks can issue cheques drawn on themselves. NBFCs can use cheques drawn on banks for transactions but cannot issue their own cheques as a bank would.
These two restrictions together reinforce that NBFCs are financial intermediaries, NOT full-service banks with transaction account/payment capabilities.
✗ NBFCs excluded from payment & settlement system · Cannot issue own cheques · Banks-only privileges
Payment & Settlement Systems Act 2007 → covers banks, not NBFCs · Cheque-issuing = bank-only function · Three NBFC exclusions: demand deposits + payment system + DICGC
4
✓ Correct — DICGC not available for NBFC depositors
DICGC deposit insurance is not available to depositors of deposit-taking NBFCs
Correct. The Deposit Insurance and Credit Guarantee Corporation (DICGC) — a wholly-owned subsidiary of RBI — provides deposit insurance of up to ₹5 lakh per depositor per bank.DICGC insurance covers only bank deposits — specifically deposits in commercial banks, cooperative banks, and local area banks. It does NOT cover:
• Deposits in NBFCs (even deposit-taking NBFCs)
• Deposits in primary cooperative societies
• Deposits in state land development banks
This means if a deposit-taking NBFC fails, its depositors have no DICGC protection — unlike bank depositors who are insured up to ₹5 lakh. This is a major risk of depositing with NBFCs instead of banks.
✓ DICGC covers bank deposits ONLY (up to ₹5 lakh) · NBFC deposits = no DICGC protection
DICGC = subsidiary of RBI · ₹5 lakh per depositor per bank · Covers commercial banks + cooperative banks + LABs · NOT NBFCs · NBFC depositors bear full credit risk
Banks vs NBFCs — The Three Classic UPSC Distinctions
| Feature | Banks | NBFCs |
| Demand Deposits (St.1) | ✓ Can accept — savings accounts, current accounts | ✗ Cannot accept demand deposits · Can accept only term deposits (NBFC-D only) |
| Payment & Settlement System (St.3) | ✓ Part of system — RTGS, NEFT, cheque clearing | ✗ NOT part of payment & settlement system · Cannot issue own cheques |
| DICGC Insurance (St.4) | ✓ DICGC insures up to ₹5 lakh per depositor per bank | ✗ DICGC not available · Depositors bear full credit risk |
| RBI Registration (St.2) | Mandatory — all banks registered with RBI | Only NBFCs with assets ≥ ₹10 crore · Nidhi/Chit Fund/Insurance regulated by other bodies |
| Regulator | RBI exclusively | RBI (most) · MCA (Nidhi) · State Govts (Chit Funds) · IRDAI (Insurance) · SEBI (Merchant Banks) |
| CRR / SLR | Mandatory maintenance of CRR & SLR | Not required to maintain CRR · Some NBFCs maintain SLR-like requirements |
Memory Trick
🧠 Three Things NBFCs CANNOT Do — D.P.D.
D = Demand Deposits (St.1 ✓): NBFCs CANNOT accept demand deposits. Only banks can. NBFCs may accept term deposits (fixed deposits), but never savings/current accounts. This is the #1 NBFC vs Bank distinction for UPSC.
P = Payment System (St.3 ✗): NBFCs are NOT part of India’s payment and settlement system. No RTGS/NEFT access of their own, no cheque-issuing on themselves. Payment systems are bank-only. “Non-Banking” = not part of banking payment infrastructure.
D = DICGC (St.4 ✓): NBFC depositors have NO DICGC protection. The ₹5 lakh insurance covers only bank deposits. If your NBFC fails, you may lose your entire deposit. This is why RBI cautions against treating NBFC deposits as equivalent to bank FDs.
St.2 trap — “ALL” is wrong: NBFCs with assets < ₹10 crore are EXEMPT from RBI registration. Nidhi companies → MCA; Chit funds → State govts; Insurance → IRDAI. “All NBFCs” → automatic wrong answer in UPSC context.
