UPSC Prelims 2010 Q25: Indian Economy – Banking & Financial Sector
With reference to the Non - banking Financial Companies (NBFCs) in India, consider the
following statements:
1. They cannot engage in the acquisition of securities issued by the government.
2. They cannot accept demand deposits like Savings Account.
Which of the statements given above is/are correct?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (b) 2 only
Explanation
NBFCs: checking two statements
Non-Banking Financial Companies (NBFCs) operate under different rules from commercial banks.
| Statement | Verdict | Reason |
|---|---|---|
| 1. Cannot engage in acquisition of government securities | Incorrect | NBFCs can invest in/acquire government securities; there is no such blanket prohibition |
| 2. Cannot accept demand deposits like Savings Accounts | Correct | A defining regulatory distinction: NBFCs are prohibited from accepting demand deposits (like savings/current accounts), unlike commercial banks |
NBFC vs Bank — key regulatory difference:
| Point | Bank | NBFC |
|---|---|---|
| Demand deposits | Can accept | Cannot accept |
| Government securities | Can invest | Can also invest |
Answer: (b) 2 only.
Why each option is right or wrong
- (a) Incorrect. NBFCs are not prohibited from acquiring government securities.
- (b) CORRECT. The defining NBFC restriction is that they cannot accept demand deposits like savings accounts, unlike banks.
- (c) Incorrect. Statement 1 is false — NBFCs can invest in government securities — so 'both' is wrong.
- (d) Incorrect. Statement 2 is accurate, so 'neither' is wrong.
Key point
NBFCs CANNOT accept demand deposits (like savings accounts) — that's the key regulatory distinction from banks — but they ARE allowed to invest in/acquire government securities.
Remember
NBFCs: cannot accept demand deposits (savings accounts) but CAN acquire government securities.
Common mistakes
- Assuming NBFCs face a blanket restriction on government securities, when they don't.
- Missing the specific, defining restriction: no demand deposits, unlike commercial banks.
- Confusing NBFC regulatory restrictions with those applicable to commercial banks.
Exam tip
NBFC's core restriction: no demand deposits (savings/current accounts). They CAN invest in government securities, unlike what some options claim.
Sources
- Reserve Bank of India Act, 1934, Chapter III-B (Provisions relating to Non-Banking Institutions Receiving Deposits)
- Reserve Bank of India — Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998