UPSC Prelims 2024 Q42: Indian Economy – Banking and Finance
- (a) 1 and 2 only
- (b) 3 only
- (c) 1, 2 and 3
- (d) 2 and 3 only
Answer: (c) 1, 2 and 3
Explanation
Financial Terms — NBFC, LAF, FII
| Term | Full Form | Definition | Correct? |
|---|---|---|---|
| NBFC | Non-Banking Financial Company | A company registered under Companies Act that provides financial services (loans, investments, insurance) but does NOT hold a banking licence - cannot accept demand deposits. Regulated by RBI. Examples: Bajaj Finance, Muthoot Finance. | TRUE |
| LAF | Liquidity Adjustment Facility | RBI's monetary policy tool - banks borrow from RBI at the repo rate (short liquidity) or park excess funds at reverse repo rate. Operates through daily auctions. Manages short-term liquidity in the banking system. | TRUE |
| FII | Foreign Institutional Investor | A registered foreign entity investing in India's financial markets (stocks, bonds). Replaced by FPI (Foreign Portfolio Investor) terminology under SEBI's 2014 regulations but FII term still appears in UPSC questions. | TRUE |
All three definitions are correct → Answer: 1, 2 and 3.
Additional context:
- NBFC vs Bank: Banks can accept savings/current deposits; NBFCs cannot. Both provide loans.
- LAF corridor: Repo rate (ceiling) and Standing Deposit Facility/SDF rate (floor) define the LAF corridor.
- FII → FPI: SEBI replaced FII/FVC categories with unified FPI regime from June 2014.
Answer: (c) 1, 2 and 3.
Why each option is right or wrong
- (a) Incorrect. 'Only one' would mean two definitions are wrong. All three — NBFC, LAF, and FII — are correctly defined.
- (b) Incorrect. 'Only two' would exclude one correct definition. NBFC (non-bank financial company), LAF (RBI liquidity tool), and FII (foreign market investor) are all accurately described.
- (c) CORRECT. All three definitions are correct. NBFC = non-bank financial company regulated by RBI; LAF = RBI's repo/reverse repo liquidity facility; FII = registered foreign investor in Indian markets.
- (d) Incorrect. 'None' is impossible — these are standard RBI and SEBI definitions with no factual errors.
Key point
NBFC = non-bank financial company (no demand deposits). LAF = RBI repo/reverse repo tool. FII = foreign investor in Indian markets. All three correct.
Remember
NBFC lends but cannot accept demand deposits. LAF is RBI's repo/reverse repo tool for daily liquidity. FII is foreign institutional investor (now FPI). All correct.
Common mistakes
- Confusing NBFC with banks — NBFCs cannot accept demand deposits (current/savings accounts).
- Thinking LAF only refers to repo rate — LAF is the entire facility including both repo and reverse repo/SDF.
- Not knowing FII was replaced by FPI in 2014 — UPSC may still use FII terminology in questions.
Exam tip
NBFC = lending without banking licence. LAF = RBI's daily liquidity valve (repo + reverse repo). FII/FPI = foreign stock/bond investors. All three standard RBI-SEBI definitions = correct.
Sources
- RBI — Monetary Policy Framework
- SEBI — FPI Regulations 2014
- NCERT Class XII — Economics (Money and Banking)