CAPF AC 2022 Q107: Indian Economy – Banking & Financial Sector
- (a) give loans
- (b) make investments
- (c) borrow from bank
- (d) seek demand deposits from public and cannot issue cheques
Answer: (d) seek demand deposits from public and cannot issue cheques
Explanation
What an NBFC cannot do
How to think: an NBFC does lending and investing like a bank.
But it is not part of the payment system.
So it cannot take deposits that are payable on demand, and it cannot issue cheques drawn on itself.
| Activity | Bank | NBFC |
|---|---|---|
| Give loans | Yes | Yes |
| Make investments | Yes | Yes |
| Borrow from banks | Yes | Yes |
| Accept demand deposits (savings and current accounts) | Yes | No |
| Issue cheques drawn on itself | Yes | No |
| Deposit insurance from DICGC | Yes | No |
Who regulates them: the Reserve Bank of India, under the RBI Act, 1934.
Some NBFCs may take fixed (term) deposits, with RBI permission.
Answer: (d).
Why each option is right or wrong
- (a) Incorrect. Giving loans is the main business of an NBFC.
- (b) Incorrect. NBFCs do invest in shares, bonds and other securities.
- (c) Incorrect. NBFCs regularly borrow from banks to fund their lending.
- (d) CORRECT. An NBFC cannot accept demand deposits or issue cheques on itself.
Key point
NBFC v. bank: no demand deposits, not part of the payment and settlement system (no cheques on itself), no DICGC deposit insurance. Regulated by the RBI. Examples: housing finance companies, microfinance institutions, Bajaj Finance, LIC Housing Finance.
Remember
NBFC: no demand deposits, no cheques, no deposit insurance.
Common mistakes
- Thinking NBFCs cannot take any deposits; some may take term deposits.
- Believing NBFCs cannot borrow from banks; banks are their main lenders.
- Assuming deposits with an NBFC carry deposit insurance.
Exam tip
Educated guess: options (a), (b) and (c) are everyday activities of finance companies. A savings account with a cheque book is something only a bank gives.
Sources
- Reserve Bank of India — Frequently Asked Questions: Non-Banking Financial Companies
- NCERT Class XII Economics — Introductory Macroeconomics (Money and Banking)