Finance to MFIs / Co-Lending Arrangements with NBFCs
Banks have deep pockets but limited last-mile reach; NBFC-MFIs have the reach but need the pockets — the co-lending model exists to combine both. Covers bank borrowings as an NBFC funding source, on-lending, NBFC-MFIs as government scheme channelising agents, the Co-Lending Model, and the Scale Based Regulation framework, with 50 exam-style MCQs with hidden answers.
📅 Updated: September 2026 • 32 min read
📊 At a Glance
Mechanism
Typical Bank Share
Co-Lending Model (CLM)
Bank funds at least 80% of the co-lent loan
On-lending via NBFC
Bank lends to NBFC, which on-lends to end borrowers, eligible for PSL classification (subject to conditions)
1 Background — Why Banks Finance NBFCs/MFIs
NBFCs and Microfinance Institutions (NBFC-MFIs) reach borrower segments — small businesses, rural households, first-time credit customers — that banks find costly to serve directly through their own branch network. Rather than compete, banks increasingly fund NBFCs/MFIs wholesale, letting the NBFC/MFI's last-mile distribution network extend credit further, while the bank earns a lending spread and (in many structures) priority sector lending (PSL) credit.
2 Bank Borrowings as a Source of Finance for NBFCs
Bank term loans/working capital lines are one of the largest funding sources for NBFCs (alongside debentures, commercial paper, and securitisation). Banks assess NBFC borrowers on parameters like capital adequacy, asset quality, asset-liability management (ALM) profile, and promoter/management track record, given the NBFC's own role as an intermediary lender.
3 Bank Loans to NBFCs for On-Lending
On-lending: RBI permits bank credit to NBFCs (other than MFIs) for on-lending to specific priority sector categories (agriculture, micro/small enterprises) to be classified by the bank as its own Priority Sector Lending (PSL), subject to conditions — e.g., a per-borrower loan cap on the on-lent amount, and the NBFC's own compliance track record — incentivising banks to fund NBFCs that specialise in priority-sector-eligible lending.
4 Bank Loans to NBFC-MFIs
Bank credit to NBFC-MFIs, extended for on-lending to individual borrowers meeting the qualifying asset criteria under RBI's microfinance regulations (household income caps, loan-size caps), is also eligible for the bank's PSL classification — a major channel through which formal bank capital reaches the microfinance sector without banks directly operating in that space.
5 NBFC-MFI as Channelising Agent for Government Schemes
🏛️
Channelising Role
NBFC-MFIs, given their deep rural/semi-urban penetration, are often designated as implementation/channelising agents for government financial inclusion and livelihood schemes, disbursing scheme benefits/credit to targeted beneficiaries.
🎯
Why MFIs Specifically
Their group-lending/JLG (Joint Liability Group) model and field-level relationship with borrowers give MFIs a distribution reach and credit-discipline mechanism banks cannot easily replicate for very small-ticket lending.
6 Co-Lending by Banks and NBFCs to Priority Sector
🤝
Combining a Bank's Capital with an NBFC's Reach
The Co-Lending Model (CLM) (revised RBI framework, 2020) lets banks and NBFCs jointly extend loans to priority sector borrowers — typically the bank funds at least 80% of the loan (with the NBFC funding the balance), while the NBFC (often possessing the borrower relationship/origination capability) handles sourcing, appraisal support, and servicing. Both entities share risk/reward per their funding proportion, and the arrangement is governed by a master agreement specifying blended interest rate methodology, escrow account mechanics for collections, and grievance redressal responsibility.
💡
Memory Trick: "80-20, Bank Leads the Way"
Under CLM, the bank funds at least 80% of the co-lent loan — remember this ratio as the model's defining numeric feature.
7 Scale Based Regulation (SBR) Framework for NBFCs
RBI's Scale Based Regulation framework (effective October 2022) tiers NBFC regulatory intensity by size/systemic importance — Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL), and Top Layer (NBFC-TL) — with progressively stricter capital, governance, and disclosure norms as an NBFC moves up the layers. Banks lending to NBFCs must factor in the borrowing NBFC's SBR layer, since Upper Layer NBFCs face bank-like regulatory scrutiny (including a mandatory listing requirement), affecting the bank's own credit risk assessment.
✓ Key Takeaways
Banks fund NBFCs/MFIs wholesale to extend credit reach into segments they cannot efficiently serve directly.
Bank credit to NBFCs for on-lending to priority sector categories (and to NBFC-MFIs for qualifying microfinance) can be classified as the bank's own PSL, subject to conditions.
NBFC-MFIs often act as channelising agents for government schemes given their rural/last-mile reach.
The Co-Lending Model has banks fund at least 80% of a jointly originated priority sector loan, with the NBFC handling origination/servicing.
RBI's Scale Based Regulation tiers NBFCs into Base/Middle/Upper/Top layers, shaping both NBFC compliance and bank credit risk assessment of NBFC borrowers.
📝 Top 50 JAIIB-Style MCQs on Bank Finance to NBFCs & MFIs
Test your understanding with these 50 practice MCQs, closely modelled on the JAIIB (PPB) exam pattern. Each question has 5 options — the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
🏦 Background & Bank Borrowings
1 Banks fund NBFCs/MFIs wholesale primarily to:
A. Extend credit reach into segments they cannot efficiently serve directly
B. Eliminate all NBFC competition
C. Avoid all forms of lending entirely
D. Replace their own branch network completely
E. Bypass RBI regulation
Answer: A. Wholesale NBFC funding extends bank credit reach efficiently.
2 Bank term loans are one of the largest funding sources for NBFCs, alongside:
A. Debentures, commercial paper, and securitisation
B. Only equity capital, with no debt funding ever used
C. Only foreign donations
D. Only government grants
E. No other funding source exists for NBFCs
Answer: A. Debentures, CP, and securitisation are other key NBFC funding sources.
3 Banks assess NBFC borrowers on parameters including:
A. Capital adequacy, asset quality, and ALM profile
B. Only the NBFC's office decor
C. No assessment is performed at all
D. Only the NBFC's social media following
E. Only the CEO's personal wealth
Answer: A. Capital adequacy, asset quality, and ALM are key assessment parameters.
🔄 On-Lending
4 Bank credit to NBFCs for on-lending to priority sector categories can be classified by the bank as:
A. The bank's own Priority Sector Lending (PSL), subject to conditions
B. Never eligible for PSL under any circumstance
C. Automatically classified as an NPA
D. Foreign exchange exposure
E. Government business
Answer: A. On-lending credit can count as the bank's own PSL, conditions applying.
5 PSL classification for on-lending via NBFCs is subject to conditions including:
A. A per-borrower loan cap on the on-lent amount
B. No conditions whatsoever
C. A requirement that the NBFC be foreign-owned
D. A requirement that the loan exceed ₹100 crore
E. Mandatory listing of the NBFC on a stock exchange
Answer: A. A per-borrower cap on the on-lent amount is a key condition.
💰 Bank Loans to NBFC-MFIs
6 Bank credit to NBFC-MFIs for qualifying on-lending is eligible for:
A. The bank's PSL classification
B. No regulatory recognition of any kind
C. Only foreign currency classification
D. Automatic write-off
E. Classification as a Bank Guarantee
Answer: A. Bank credit to NBFC-MFIs for qualifying lending gets PSL classification.
7 RBI's microfinance regulations impose qualifying asset criteria including:
A. Household income caps and loan-size caps
B. No criteria of any kind
C. Only foreign national eligibility
D. Only corporate borrower eligibility
E. Only for loans above ₹100 crore
Answer: A. Household income and loan-size caps define qualifying microfinance assets.
🏛️ Channelising Agent
8 NBFC-MFIs are often designated as channelising agents for government schemes due to their:
A. Deep rural/semi-urban penetration
B. Lack of any borrower relationships
C. Exclusive focus on urban corporate clients
D. Absence of any distribution network
E. Zero connection to financial inclusion
Answer: A. Deep rural/semi-urban reach makes MFIs suitable channelising agents.
9 The Joint Liability Group (JLG) model gives MFIs:
A. A distribution reach and credit-discipline mechanism for small-ticket lending
B. No advantage over traditional bank lending
C. A mechanism used only for large corporate loans
D. No connection to microfinance
E. A structure identical to a bank branch
Answer: A. JLG provides distribution reach and credit discipline for small-ticket lending.
🤝 Co-Lending Model
10 Under the Co-Lending Model, the bank typically funds:
A. At least 80% of the co-lent loan
B. Exactly 1% of the loan
C. None of the loan; the NBFC funds 100%
D. Exactly 50%, with no other ratio possible
E. 10% only
Answer: A. The bank typically funds at least 80% under CLM.
11 RBI's revised Co-Lending Model framework was issued in:
A. 2020
B. 1999
C. 1935
D. 1949
E. 1993
Answer: A. The revised CLM framework was issued in 2020.
12 In a Co-Lending arrangement, the NBFC typically handles:
A. Sourcing, appraisal support, and servicing
B. No role whatsoever
C. Only the bank's internal audit function
D. Setting the bank's monetary policy
E. Issuing currency notes
Answer: A. The NBFC handles sourcing, appraisal support, and servicing.
13 Co-Lending arrangements are governed by:
A. A master agreement specifying rate methodology, escrow mechanics, and grievance responsibility
B. No formal agreement at all
C. A verbal understanding only
D. An agreement drafted solely by the borrower
E. An informal handshake with no documentation
Answer: A. A formal master agreement governs Co-Lending arrangements.
📊 Scale Based Regulation
14 RBI's Scale Based Regulation framework for NBFCs became effective:
A. October 2022
B. 1999
C. 1949
D. 1935
E. 2002
Answer: A. SBR became effective in October 2022.
15 The SBR framework tiers NBFCs into:
A. Base, Middle, Upper, and Top Layers
B. A single uniform category with no tiers
C. Only two categories: small and large
D. Ten distinct layers
E. No categorisation of any kind
Answer: A. SBR uses Base/Middle/Upper/Top Layer tiers.
16 NBFC-Upper Layer entities face:
A. Bank-like regulatory scrutiny, including a mandatory listing requirement
B. No regulation of any kind
C. Fewer regulatory requirements than Base Layer NBFCs
D. Regulation identical to a sole proprietorship
E. Complete exemption from RBI oversight
Answer: A. Upper Layer NBFCs face bank-like scrutiny including mandatory listing.
17 A bank lending to an NBFC should factor in the NBFC's:
A. SBR layer, affecting the bank's credit risk assessment
B. Office address alone, with no other consideration
C. No regulatory factor at all
D. Only its logo design
E. Only its social media presence
Answer: A. The NBFC's SBR layer affects the bank's own risk assessment.
🧩 Mixed / Comprehensive
18 Which of the following best explains why banks prefer co-lending over solely funding an NBFC's balance sheet for priority sector lending?
A. Co-lending gives the bank direct exposure/ownership in each underlying loan, alongside the NBFC's origination reach, rather than pure wholesale funding
B. Co-lending eliminates all bank involvement in the underlying loans
C. Co-lending and wholesale funding are functionally identical
D. Co-lending applies only to corporate loans, never priority sector
E. Banks never have a preference between the two approaches
Answer: A. Co-lending gives direct loan-level exposure combined with NBFC reach.
19 Which of the following best explains why RBI mandates a minimum 80% bank share in the Co-Lending Model?
A. To ensure the bank bears meaningful ("skin in the game") exposure and doesn't merely rent out its balance sheet for PSL classification
B. The 80% requirement has no risk-alignment purpose
C. It ensures the NBFC bears all the risk with none for the bank
D. The ratio was set arbitrarily with no policy rationale
E. It applies only to non-priority-sector lending
Answer: A. The 80% minimum ensures genuine bank risk participation, not just balance-sheet renting.
20 Which of the following would be an appropriate reason RBI links bank credit-for-on-lending's PSL eligibility to a per-borrower cap?
A. To ensure the on-lent credit actually reaches small, genuinely priority-sector-eligible borrowers rather than large borrowers routed through an NBFC
B. Per-borrower caps have no policy purpose
C. The cap ensures only the largest borrowers benefit
D. PSL eligibility has no connection to borrower size
E. The cap applies only to co-lending, never on-lending
Answer: A. The cap ensures on-lent credit reaches genuinely small, priority-sector borrowers.
21 Which of the following would be an appropriate consideration in the escrow account mechanics of a co-lending arrangement?
A. Ensuring collections from borrowers are appropriately split and remitted to the bank and NBFC per their funding share
B. Escrow accounts have no role in co-lending
C. All collections go entirely to the NBFC with none to the bank
D. Escrow mechanics apply only to trade finance, never co-lending
E. Collections are never split between the two lenders
Answer: A. Escrow mechanics ensure proper collection-splitting per funding shares.
22 Which of the following would be an appropriate reason a bank monitors an NBFC-MFI's group-lending discipline before extending wholesale funding?
A. The MFI's on-ground collection discipline directly affects the ultimate repayment quality of the bank's wholesale exposure
B. Group-lending discipline has no bearing on the bank's credit risk
C. Banks never assess an NBFC-MFI's operational practices
D. Collection discipline is irrelevant to wholesale funding decisions
E. MFI operations have no connection to loan repayment quality
Answer: A. MFI collection discipline affects the bank's ultimate exposure quality.
23 Which of the following best explains why the SBR framework applies progressively stricter norms as an NBFC grows in size/systemic importance?
A. Larger, more interconnected NBFCs pose greater systemic risk if they fail, warranting closer regulatory oversight proportionate to that risk
B. Larger NBFCs pose no additional systemic risk compared to smaller ones
C. SBR applies identical norms regardless of NBFC size
D. Smaller NBFCs face stricter norms than larger ones under SBR
E. Systemic risk has no connection to regulatory tiering
Answer: A. Proportionate scrutiny addresses the greater systemic risk of larger NBFCs.
24 Which of the following would be an appropriate scenario for a bank to use on-lending (rather than co-lending) with an NBFC?
A. The bank wants to fund the NBFC's overall priority sector book without co-originating individual loans jointly
B. On-lending requires the bank to jointly originate every individual loan, identical to co-lending
C. On-lending and co-lending are legally identical structures
D. On-lending applies only to non-priority-sector categories
E. On-lending is banned under current RBI rules
Answer: A. On-lending funds the NBFC's book generally, without joint loan-level origination.
25 Which of the following would be a plausible reason RBI revised its Co-Lending framework in 2020?
A. To formalise and streamline an emerging bank-NBFC collaboration model, improving priority sector credit flow with clearer risk-sharing rules
B. The 2020 revision eliminated co-lending entirely
C. Co-lending had no prior framework or informal practice before 2020
D. The revision had no connection to priority sector lending
E. RBI has never issued any guidance on co-lending
Answer: A. The 2020 revision formalised bank-NBFC collaboration with clearer risk-sharing rules.
26 Which of the following would be an appropriate grievance redressal consideration in a co-lending arrangement?
A. The master agreement should clearly specify which entity (bank or NBFC) is primarily responsible for handling borrower complaints
B. Grievance redressal has no relevance to co-lending structures
C. Borrowers have no recourse in a co-lending arrangement
D. Only the NBFC, never the bank, can ever be held accountable
E. The master agreement need not address grievance responsibility at all
Answer: A. Clear grievance-responsibility allocation is essential in the master agreement.
27 Which of the following best explains the "blended interest rate" concept in co-lending?
A. The final rate charged to the borrower reflects a weighted combination of the bank's and NBFC's respective cost of funds/margins
B. Blended rate means the borrower is charged two completely separate, unrelated interest rates simultaneously
C. Blended rate has no connection to the two lenders' funding costs
D. Only the NBFC's rate applies, with no bank contribution
E. Blended rate applies only to on-lending, never co-lending
Answer: A. The blended rate reflects a weighted mix of both lenders' costs/margins.
28 Which of the following would be an appropriate reason a bank conducts enhanced due diligence before entering a co-lending partnership with a new NBFC?
A. The bank's own priority sector/regulatory compliance and reputation are tied to the NBFC partner's origination and servicing quality
B. Due diligence has no relevance once a co-lending agreement is signed
C. The bank bears zero responsibility for the NBFC partner's conduct
D. Enhanced due diligence applies only to on-lending, never co-lending
E. NBFC partner quality has no bearing on the bank's compliance
Answer: A. The bank's compliance/reputation depends on its NBFC partner's practices.
29 Which of the following would be an appropriate reason RBI's channelising-agent role for NBFC-MFIs is significant for financial inclusion policy?
A. It leverages an existing, trusted rural distribution network rather than building new government infrastructure from scratch
B. Channelising agents have no role in financial inclusion policy
C. Government schemes never use any private-sector channelising agents
D. NBFC-MFIs have no rural presence of any kind
E. This role applies only to urban corporate schemes
Answer: A. Leveraging existing MFI networks avoids duplicating rural infrastructure.
30 Which of the following best explains why an NBFC's asset-liability management (ALM) profile matters to a bank extending wholesale credit?
A. A mismatched ALM profile (short-term borrowing funding long-term lending) increases the NBFC's liquidity/default risk, affecting the bank's exposure
B. ALM profile has no bearing on an NBFC's creditworthiness
C. Banks never assess ALM when lending to NBFCs
D. ALM mismatches always improve an NBFC's credit risk profile
E. ALM is relevant only to banks, never NBFCs
Answer: A. ALM mismatches raise NBFC liquidity/default risk, affecting the lending bank.
31 Which of the following would be an appropriate example of "systemic importance" driving an NBFC's classification into the Upper Layer under SBR?
A. A very large asset size and extensive interconnectedness with the broader financial system
B. A tiny, single-branch NBFC with negligible assets
C. Systemic importance has no bearing on SBR layer classification
D. Only the NBFC's founding date determines its layer
E. Layer classification is randomly assigned with no criteria
Answer: A. Large size and interconnectedness drive Upper Layer classification.
32 Which of the following would be the most appropriate reason for a bank's board-approved policy on NBFC/MFI exposure limits?
A. To manage concentration risk from wholesale lending to intermediary entities whose own portfolios the bank cannot directly monitor loan-by-loan
B. Exposure limits have no risk-management purpose
C. Banks face no concentration risk when lending to NBFCs/MFIs
D. Board policy is irrelevant to wholesale lending decisions
E. NBFC/MFI exposure carries identical risk to direct retail lending
Answer: A. Exposure limits manage concentration risk from wholesale intermediary lending.
33 Which of the following would be an appropriate consequence if an NBFC's borrower loan under on-lending exceeds the prescribed per-borrower PSL cap?
A. That specific loan portion would not qualify for the bank's PSL classification
B. The entire bank's PSL book becomes automatically void
C. No consequence exists regardless of the cap
D. The NBFC's licence is automatically cancelled
E. The loan is automatically classified as an NPA
Answer: A. Exceeding the cap disqualifies that portion from PSL classification.
34 Which of the following would be an appropriate distinguishing feature between a Base Layer and Top Layer NBFC under SBR?
A. Top Layer NBFCs face the most intensive regulatory requirements, reserved for NBFCs RBI specifically identifies as posing the highest systemic risk
B. Base Layer NBFCs face more stringent requirements than Top Layer NBFCs
C. Both layers face identical regulatory requirements
D. Top Layer is the least regulated tier under SBR
E. No distinction exists between any SBR layers
Answer: A. Top Layer NBFCs face the most intensive scrutiny for the highest systemic risk.
35 Which of the following would be an appropriate reason a bank prefers co-lending with an NBFC-MFI specifically (versus a generic NBFC) for reaching rural microfinance borrowers?
A. NBFC-MFIs specialise in the group-lending, small-ticket model suited to that specific borrower segment
B. Generic NBFCs always have superior rural microfinance expertise
C. NBFC-MFIs have no specialised capability relevant to microfinance
D. Co-lending with NBFC-MFIs is banned under current RBI rules
E. There is no meaningful distinction between NBFC-MFIs and generic NBFCs
Answer: A. NBFC-MFIs' specialised group-lending model suits microfinance borrowers.
36 Which of the following would be an appropriate monitoring practice for a bank's co-lending portfolio?
A. Periodic review of the underlying loan-level performance data shared by the NBFC partner
B. No monitoring is required once the master agreement is signed
C. The bank relies solely on the NBFC's verbal assurances with no data review
D. Monitoring applies only to wholesale on-lending, never co-lending
E. Loan-level data sharing is prohibited under co-lending rules
Answer: A. Periodic loan-level performance review is essential co-lending monitoring.
37 Which of the following best captures the overall policy intent connecting on-lending, co-lending, and channelising-agent arrangements?
A. Each mechanism, in different ways, channels formal bank capital toward underserved segments by leveraging NBFC/MFI distribution capabilities
B. These mechanisms have no shared policy purpose
C. Only channelising-agent arrangements involve any bank capital
D. These arrangements exist solely to benefit large corporate borrowers
E. NBFC/MFI distribution capability is irrelevant to any of these mechanisms
Answer: A. All three mechanisms channel bank capital to underserved segments via NBFC/MFI reach.
38 Which of the following would be an appropriate reason RBI requires NBFC-Upper Layer entities to eventually list on a stock exchange?
A. Listing brings greater market discipline, disclosure requirements, and public scrutiny commensurate with the NBFC's systemic footprint
B. Listing has no connection to systemic risk oversight
C. Listing requirements apply only to Base Layer NBFCs
D. Listing eliminates all regulatory requirements for the NBFC
E. This requirement applies to every NBFC regardless of layer
Answer: A. Listing brings market discipline commensurate with systemic footprint.
39 Which of the following would be an appropriate example of risk-sharing under the co-lending model in case of borrower default?
A. Both the bank and NBFC absorb losses in proportion to their respective funding shares in that loan
B. Only the NBFC bears any loss, regardless of funding proportion
C. Only the bank bears any loss, regardless of funding proportion
D. No loss-sharing mechanism exists under co-lending
E. Losses are always split 50-50 regardless of actual funding shares
Answer: A. Losses are shared proportionate to each lender's funding share.
40 Which of the following would be an appropriate reason a bank's internal credit committee treats NBFC/MFI wholesale exposure as a distinct risk category from direct retail lending?
A. The bank's actual credit risk depends on both the NBFC/MFI's own creditworthiness and the quality of its underlying loan book, adding a layer of indirect exposure
B. NBFC/MFI exposure carries identical risk characteristics to direct retail loans
C. Wholesale exposure to intermediaries requires no distinct risk treatment
D. Indirect exposure through an intermediary carries no additional risk layer
E. Credit committees never distinguish between exposure types
Answer: A. Indirect exposure through an intermediary adds a distinct risk layer.
41 Which of the following would be a valid reason banks value NBFC-MFI partnerships for expanding financial inclusion metrics?
A. MFI-originated priority sector loans (via on-lending/co-lending) help banks meet regulatory PSL targets efficiently
B. MFI partnerships have no connection to PSL target achievement
C. PSL targets can be met only through direct branch-based lending
D. Financial inclusion metrics are unrelated to NBFC-MFI partnerships
E. Banks never use NBFC/MFI channels to support PSL compliance
Answer: A. MFI-originated PSL loans help banks meet PSL targets efficiently.
42 Which of the following would be an appropriate reason RBI periodically reviews and updates its SBR thresholds?
A. To keep pace with the growing scale and evolving risk profile of the NBFC sector over time
B. SBR thresholds, once set, are permanently fixed with no review ever
C. The NBFC sector's risk profile never changes over time
D. Threshold reviews have no policy rationale
E. SBR was designed to remain static regardless of sector growth
Answer: A. Periodic review keeps SBR aligned with the sector's evolving scale/risk.
43 Which of the following would be an appropriate description of why a bank's co-lending disclosure to the borrower matters?
A. Borrowers should be aware that two entities (bank and NBFC) are jointly involved in their loan, including for grievance and servicing purposes
B. Disclosure to borrowers is unnecessary in co-lending arrangements
C. Borrowers need not know which entities are involved in servicing their loan
D. Co-lending disclosure applies only to corporate borrowers, never retail
E. Transparency has no relevance to co-lending structures
Answer: A. Borrowers should know both entities' roles for servicing/grievance purposes.
44 Which of the following would be an appropriate reason for RBI's continued policy focus on channelling formal credit to NBFC-MFI borrowers rather than direct bank lending in that segment?
A. Direct bank lending to very small, dispersed rural borrowers is often not commercially efficient given branch cost structures, making the MFI intermediation model more practical
B. Banks always find direct rural lending more efficient than MFI intermediation
C. MFI intermediation has no cost-efficiency advantage over direct bank lending
D. RBI discourages any bank involvement in rural microfinance
E. Branch cost structures have no bearing on lending channel choice
Answer: A. MFI intermediation is often more cost-efficient than direct bank lending to dispersed rural borrowers.
45 Which of the following would be an appropriate reason a bank's internal audit reviews co-lending arrangements periodically?
A. To verify the fund-sharing ratio, collection remittance, and PSL classification compliance are being correctly maintained
B. Internal audit has no role in reviewing co-lending arrangements
C. Once established, co-lending arrangements require no ongoing verification
D. Audit review applies only to on-lending, never co-lending
E. Compliance verification is the sole responsibility of the NBFC, never the bank
Answer: A. Internal audit verifies fund-sharing, remittance, and PSL compliance.
46 Which of the following would be an appropriate example of how a bank's PSL shortfall might be addressed via NBFC/MFI channels?
A. Increasing co-lending or on-lending arrangements with NBFC-MFIs to boost qualifying priority sector exposure
B. PSL shortfalls have no connection to NBFC/MFI channels
C. Only direct branch lending can ever address a PSL shortfall
D. NBFC/MFI-routed credit never counts toward PSL targets
E. PSL shortfalls are addressed solely through RIDF deposits, never lending channels
Answer: A. Co-lending/on-lending can help address a bank's PSL shortfall.
47 Which of the following would be an appropriate reason a bank prices its wholesale lending to a Base Layer NBFC differently from an Upper Layer NBFC?
A. The differing regulatory scrutiny, disclosure, and governance standards across layers translate into different perceived credit risk
B. Pricing is always identical regardless of the NBFC's SBR layer
C. SBR layer has no bearing on credit risk perception
D. Base Layer NBFCs always receive better pricing than Upper Layer NBFCs
E. Regulatory scrutiny levels are irrelevant to loan pricing decisions
Answer: A. Differing regulatory rigor across layers affects perceived credit risk and pricing.
48 Which of the following would be an appropriate way to distinguish "on-lending" from a bank's "co-lending" arrangement in terms of loan-level bank involvement?
A. On-lending gives the bank exposure to the NBFC (not the end borrower directly); co-lending gives the bank direct, proportionate exposure to each individual end-borrower loan
B. Both structures give the bank identical direct exposure to end borrowers
C. On-lending gives direct end-borrower exposure while co-lending does not
D. Neither structure involves any bank exposure at all
E. There is no meaningful distinction between on-lending and co-lending
Answer: A. On-lending exposes the bank to the NBFC; co-lending gives direct per-loan exposure.
49 Which of the following best summarises why this topic (bank finance to NBFCs/MFIs) is grouped within JAIIB's "Functions of Banks" module?
A. Wholesale/co-lending finance to NBFCs and MFIs is a core, growing lending function through which banks extend credit reach and meet priority sector obligations
B. This topic has no connection to a bank's core lending functions
C. Banks never engage in any form of NBFC/MFI financing
D. This topic belongs exclusively to insurance regulation, not banking
E. NBFC/MFI financing is irrelevant to priority sector lending
Answer: A. This is a core bank lending function extending reach and meeting PSL obligations.
50 Overall, which statement best summarises this topic?
A. Banks finance NBFCs/MFIs through wholesale borrowings, on-lending (PSL-eligible under conditions), and the Co-Lending Model (bank funds ≥80%), while NBFC-MFIs serve as government scheme channelising agents — all shaped by RBI's Scale Based Regulation framework governing NBFC risk tiering
B. Banks have no financial relationship with NBFCs or MFIs of any kind
C. Co-Lending requires the NBFC to fund at least 80% of every loan
D. SBR applies uniformly with no tiering based on NBFC size
E. On-lending credit can never qualify for a bank's PSL classification
Answer: A. This correctly captures the full bank-NBFC/MFI finance framework.
Disclaimer: This article is prepared for educational and exam-preparation purposes only, summarising bank-NBFC/MFI finance arrangements as of September 2026. Candidates should cross-check the latest official IIBF syllabus and RBI guidelines before the exam.