UPSC Prelims 2026Question 99Economy

Consider the following statements about the Non-Banking Financial Companies (NBFCs) in India:
1. NBFCs cannot accept demand deposits.
2. All the NBFCs operating in India have to be registered with the RBI.
3. NBFCs form part of the payment and settlement system and can issue cheque drawn on itself.
4. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to the depositors of deposit taking NBFCs.
Which of the statements given above is/are correct?

Options

(a)1 and 4
(b)1, 2 and 3
(c)4 only
(d)2, 3 and 4

Correct answer: a

Decision rule

Bank-only privileges - demand deposits, cheques drawn on itself, DICGC cover, payment-system membership - never extend to NBFCs.

Explanation

Correct Answer

(a) 1 and 4

Explanation of the Correct Answer

Statement 1 is correct

NBFCs cannot accept demand deposits.
Demand deposits are deposits withdrawable on demand, such as current account and savings account deposits.
This is a key difference between banks and NBFCs. The RBI’s FAQ on NBFCs clearly states that NBFCs cannot accept demand deposits. (Reserve Bank of India)

Statement 2 is incorrect

It is not correct to say that all NBFCs operating in India have to be registered with RBI.
Generally, NBFCs are required to register with RBI, but certain categories are regulated by other regulators.
For example:
- Housing finance companies are regulated by RBI, though historically associated with NHB.
- Insurance companies are regulated by Insurance Regulatory and Development Authority of India (IRDAI).
- Stock broking, merchant banking, venture capital funds, and mutual funds are regulated by Securities and Exchange Board of India (SEBI).
- Nidhi companies are regulated under the Companies Act framework.

Thus, the word “all” makes the statement incorrect.

Statement 3 is incorrect

NBFCs do not form part of the payment and settlement system.
They also cannot issue cheques drawn on themselves.
This is another key distinction between banks and NBFCs. RBI states that NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves. (Reserve Bank of India)

Statement 4 is correct

Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of NBFCs.
Even deposit-taking NBFCs are not covered by DICGC deposit insurance.
RBI’s NBFC FAQ specifically mentions that deposit insurance facility of DICGC is not available to depositors of NBFCs. (Reserve Bank of India)

Therefore, statements 1 and 4 are correct.

Why Other Options Are Incorrect

Option	Verdict	Explanation
(a) 1 and 4	Correct	NBFCs cannot accept demand deposits, and DICGC insurance is not available to NBFC depositors.
(b) 1, 2 and 3	Incorrect	Statements 2 and 3 are incorrect. Not all NBFC-like financial entities are registered with RBI, and NBFCs cannot issue cheques drawn on themselves.
(c) 4 only	Incorrect	Statement 4 is correct, but Statement 1 is also correct.
(d) 2, 3 and 4	Incorrect	Statements 2 and 3 are incorrect; only Statement 4 is correct among these.

Relevant Supplementary Information

NBFCs vs Banks

Basis	Banks	NBFCs
Demand deposits	Can accept demand deposits	Cannot accept demand deposits
Cheque issuance	Can issue cheques drawn on themselves	Cannot issue cheques drawn on themselves
Payment and settlement system	Form part of payment and settlement system	Do not form part of payment and settlement system
Deposit insurance	Eligible bank deposits are covered by DICGC	NBFC deposits are not covered by DICGC
Credit creation	Banks participate directly in payment-based money creation	NBFCs do not create money in the same way
Main function	Accept deposits and lend	Provide credit and financial services, but with restrictions
Regulator	RBI	RBI for most NBFCs; some financial entities may be under other regulators depending on activity

Types of NBFCs / NBFC-like Financial Entities

Entity / Category	Main Activity	Regulator / Framework
NBFC-Investment and Credit Company	Lending and investment	RBI
NBFC-MFI	Microfinance lending	RBI
NBFC-Factor	Factoring / receivables finance	RBI
Infrastructure Finance Company	Infrastructure financing	RBI
Core Investment Company	Holding investments in group companies	RBI
Housing Finance Company	Housing finance	RBI, with historical role of NHB
Insurance Company	Insurance business	IRDAI
Merchant Banker / Stock Broker	Securities market activity	SEBI
Mutual Fund	Pooled investment vehicle	SEBI
Nidhi Company	Mutual benefit lending among members	Companies Act / Ministry of Corporate Affairs framework

Key Takeaways from the Tables

Point	Explanation
NBFCs are not banks	They perform financial functions but do not enjoy all banking privileges.
Demand deposits are prohibited	NBFCs cannot accept deposits payable on demand.
Cheque issuance is not allowed	NBFCs cannot issue cheques drawn on themselves.
DICGC insurance does not cover NBFC deposits	This is a major depositor-protection distinction from banks.
The word “all” is risky in NBFC questions	Some financial activities/entities are regulated by regulators other than RBI.
Correct answer is 1 and 4	These two are standard RBI-stated differences between banks and NBFCs.

Point	Explanation
NBFCs cannot accept demand deposits	This is the most important distinction from banks.
NBFCs are not part of payment and settlement system	They cannot issue cheques drawn on themselves.
DICGC insurance does not cover NBFC deposits	Even deposit-taking NBFC depositors do not get DICGC protection.
Some NBFCs can accept public deposits	But only if specifically permitted and subject to RBI conditions.
NBFCs are important lenders	They support vehicle finance, MSME loans, microfinance, housing and consumer credit.
Exam keyword	Banks can accept demand deposits and issue cheques; NBFCs cannot.

Context and Current Relevance

NBFCs are important for credit delivery to MSMEs, vehicle buyers, housing borrowers, microfinance borrowers, and underserved segments.
However, because they cannot accept demand deposits and are not covered by DICGC insurance, their regulatory treatment differs from banks.
The distinction became especially important after NBFC-sector stress episodes such as IL&FS and DHFL, which led to tighter RBI supervision.

Table: NBFCs — Key Facts

Parameter	Details
Full form	Non-Banking Financial Company
Regulated mainly by	Reserve Bank of India
Basic nature	Financial institution that provides credit and other financial services but is not a bank
Can accept demand deposits?	No
Can accept public deposits?	Only certain eligible deposit-taking NBFCs, subject to RBI norms
Can issue cheques drawn on itself?	No
Part of payment and settlement system?	No
DICGC deposit insurance available?	No
Main activities	Lending, investment, asset finance, microfinance, infrastructure finance, factoring
Important difference from banks	NBFCs cannot accept demand deposits and cannot issue self-drawn cheques

Table: Banks vs NBFCs

Basis	Banks	NBFCs
Legal nature	Banking institutions	Non-banking financial institutions
Demand deposits	Can accept	Cannot accept
Savings/current accounts	Can offer	Cannot offer like banks
Cheque facility	Can issue cheques drawn on themselves	Cannot issue cheques drawn on themselves
Payment and settlement system	Part of the system	Not part of the system
DICGC insurance	Available for eligible bank deposits	Not available for NBFC deposits
Credit creation	Can create credit through deposit lending	Cannot create money in the same way as banks
Main business	Accepting deposits and lending	Lending, investment, leasing, hire purchase, factoring, microfinance
Regulator	RBI	RBI for most NBFCs; some financial entities are regulated by other regulators depending on activity

Table: NBFC Statements — Correct Understanding

Statement Type	Correct Position
NBFCs cannot accept demand deposits	Correct
All NBFCs can accept public deposits	Incorrect
Only eligible deposit-taking NBFCs can accept public deposits	Correct
NBFCs can issue cheques drawn on themselves	Incorrect
NBFCs form part of payment and settlement system	Incorrect
DICGC insurance is available to NBFC depositors	Incorrect
DICGC insurance is not available to NBFC depositors	Correct
NBFCs can provide loans and advances	Correct
NBFCs are identical to banks	Incorrect
Some financial entities are regulated by SEBI, IRDAI or other regulators	Correct

Table: Types of NBFCs

Type of NBFC	Main Activity	Example of Function
NBFC-ICC	Investment and Credit Company	Lending and investment activities
NBFC-MFI	Microfinance Institution	Small loans to low-income households and micro-enterprises
NBFC-Factor	Factoring business	Financing receivables / invoices
Infrastructure Finance Company	Infrastructure lending	Financing roads, power, ports, telecom projects
Infrastructure Debt Fund-NBFC	Long-term infrastructure debt	Refinancing infrastructure projects
Core Investment Company	Holding investments in group companies	Investment holding company
Mortgage Guarantee Company	Mortgage guarantee business	Guaranteeing housing loans
Account Aggregator	Financial data-sharing framework	Consent-based sharing of financial information
P2P Lending Platform	Peer-to-peer lending platform	Connecting individual lenders and borrowers

Table: Deposit-Taking vs Non-Deposit-Taking NBFCs

Basis	Deposit-Taking NBFCs	Non-Deposit-Taking NBFCs
Can accept public deposits?	Yes, if permitted by RBI	No
Can accept demand deposits?	No	No
Regulatory scrutiny	Higher due to depositor interest	Depends on size and systemic importance
DICGC cover	Not available	Not applicable
Funding source	Public deposits, bank loans, bonds, market borrowings	Bank loans, bonds, debentures, institutional borrowing
Risk concern	Depositor protection	Systemic risk and credit risk
Example function	Fixed deposit-like public deposits under RBI norms	Vehicle finance, consumer finance, infrastructure lending

Table: Important NBFC-Related Regulatory Concepts

Concept	Meaning	Relevance
Demand deposit	Deposit withdrawable on demand	NBFCs cannot accept it
Public deposit	Deposit accepted from public under regulated conditions	Only eligible NBFCs may accept it
DICGC	Deposit Insurance and Credit Guarantee Corporation	Covers eligible bank deposits, not NBFC deposits
Payment and settlement system	System enabling transfer and settlement of money	Banks participate; NBFCs generally do not
Systemically Important NBFC	Large NBFC whose failure may affect financial stability	Subject to stronger regulation
Scale-Based Regulation	RBI framework classifying NBFCs by size, activity and risk	Strengthens supervision
Capital adequacy	Minimum capital requirement against risk assets	Ensures financial stability
Asset classification norms	Rules for identifying standard and non-performing assets	Helps manage credit risk
Fair Practices Code	Conduct norms for lenders	Protects borrowers from unfair practices

Table: Common Exam Traps Related to NBFCs

Trap Statement	Correct Understanding
NBFCs are banks without a banking licence	Incorrect. They are financial companies but not banks.
NBFCs can accept demand deposits	Incorrect. They cannot.
NBFCs can accept savings and current account deposits	Incorrect. These are demand deposits.
NBFCs can accept public deposits if permitted	Correct, but only specific eligible NBFCs.
NBFCs can issue cheques drawn on themselves	Incorrect. They cannot.
NBFC depositors get DICGC insurance	Incorrect. DICGC cover is not available to NBFC depositors.
NBFCs can provide loans	Correct. Lending is a major NBFC activity.
All NBFC-like entities are regulated only by RBI	Incorrect. Some financial entities are regulated by SEBI, IRDAI, MCA or other regulators depending on activity.
NBFCs are important for credit delivery	Correct. They serve MSMEs, vehicle finance, housing, microfinance and consumer credit sectors.

Open this in the study app →