JAIIB Paper 1 • Indian Economy & Indian Financial System (IE&IFS)
Non-Banking Financial Companies (NBFCs)
India's âš80-lakh-crore-plus shadow-banking engine â the companies that reach borrowers banks often can't. This guide covers the meaning and evolution of NBFCs, their role in inclusive growth, regulators, classification & types, Owned Funds/NOF, bank finance to NBFCs, the Fair Practice Code, Ombudsman applicability, and RBI's Scale Based Regulation (SBR) framework â with 50 exam-style MCQs with hidden answers.
đ Updated: September 2026 • 30 min read
đ At a Glance
đĸ
What Sets NBFCs Apart
They lend and invest like banks, but cannot accept demand deposits or issue cheques on themselves.
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Regulator
Chiefly RBI (Chapter IIIB, RBI Act), with segment-specific NBFCs regulated by SEBI/IRDAI/PFRDA.
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Current Framework
Scale Based Regulation (SBR), effective October 2022 â a 4-layer, risk-proportionate structure.
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures, leasing, hire-purchase, insurance or chit-fund business â but excluding any institution whose principal business is agriculture, industry, or the sale/purchase/construction of immovable property.
Key Differences from a Bank
Basis
Bank
NBFC
Demand deposits
Can accept
Cannot accept demand deposits (withdrawable by cheque)
Payment system
Part of the payment & settlement system
Not part of the payment & settlement system
CRR/SLR
Mandatory
Not applicable (except NBFCs-D maintain limited liquid assets)
DICGC insurance
Deposits insured up to âš5 lakh
NBFC deposits are not DICGC-insured
Governing statute
Banking Regulation Act, 1949
Chapter IIIB, RBI Act, 1934
2 Evolution of NBFCs in India
NBFCs have existed alongside India's banking system for decades, initially operating with light-touch regulation and filling credit gaps â vehicle finance, equipment leasing, consumer durable loans â that banks were slow to serve. Regulatory tightening accelerated after periodic stress episodes (notably the IL&FS default (2018) and the resulting liquidity crisis across the NBFC sector), pushing RBI toward progressively stronger, bank-like prudential norms â culminating in the current Scale Based Regulation framework (Section 9).
3 Role of NBFCs in Promoting Inclusive Growth
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Last-Mile Credit
Reach borrowers (small transport operators, gig workers, unbanked MSMEs) banks find costly to serve directly.
Respective State Governments (under the Chit Funds Act)
Nidhi companies
Ministry of Corporate Affairs
5 Classification & Types of NBFCs
By Liability Structure
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NBFC-D (Deposit-Taking)
Permitted to accept public deposits (subject to strict RBI limits, credit rating, and liquid-asset maintenance) â a small, tightly regulated minority of NBFCs.
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NBFC-ND (Non-Deposit-Taking)
Cannot accept public deposits; funded via own capital, market borrowings and bank lines â the vast majority of NBFCs.
Microfinance loans to low-income households (see our dedicated guide)
NBFC-Factor
Factoring business (receivables financing)
Infrastructure Finance Company (NBFC-IFC)
Infrastructure loans, with 75%+ assets in infra
Infrastructure Debt Fund (IDF-NBFC)
Refinances infrastructure projects post-commissioning via long-term bonds
Core Investment Company (CIC)
Holds shares/investments in group companies (a holding-company structure)
Housing Finance Company (HFC)
Home loans â RBI-regulated since 2019
NBFC-Account Aggregator (NBFC-AA)
Consent-based financial data sharing (no lending)
NBFC-P2P
Peer-to-peer lending platform
JAIIB tip: In 2019, RBI merged the erstwhile Asset Finance, Loan and Investment Company categories into a single, simplified "Investment and Credit Company" (NBFC-ICC) classification â remember this consolidation.
6 Owned Funds & Net Owned Funds (NOF)
Owned Funds = Paid-up equity capital + free reserves + share premium (as per latest audited balance sheet) â accumulated losses â deferred revenue expenditure â other intangible assets.
Net Owned Funds (NOF) = Owned Funds â (investments in shares of subsidiaries/group companies + book value of debentures/bonds/loans to those entities, to the extent exceeding 10% of Owned Funds).
JAIIB tip: NOF strips out a company's investments in its own group/subsidiary entities beyond a threshold â designed to prevent NBFCs from inflating their apparent capital base through circular intra-group holdings. A minimum NOF is a precondition for NBFC registration with RBI.
7 Bank Finance to NBFCs
Banks are significant lenders to NBFCs (who then on-lend to end borrowers). RBI permits bank credit to NBFCs for on-lending to be classified as Priority Sector Lending in specified categories (agriculture, MSME, housing â subject to conditions and sub-limits), recognising NBFCs' role in last-mile priority-sector credit delivery.
JAIIB tip: Following the 2018 IL&FS crisis, RBI tightened banks' single/group exposure limits to NBFCs, given the systemic interconnectedness risk this funding channel represents.
8 Fair Practice Code & Ombudsman Scheme Applicability
Fair Practice Code (FPC)
All NBFCs must adopt a board-approved Fair Practice Code covering transparent loan pricing/disclosure, non-coercive recovery, and a defined grievance redressal mechanism â closely mirroring the bank Fair Practices Code, and specifically tightened for NBFC-MFIs (see our Micro Finance Institutions guide).
RBI Ombudsman Scheme for NBFCs
RBI's Integrated Ombudsman Scheme, 2021 extends the RBI Ombudsman's cost-free grievance redressal mechanism to deposit-taking NBFCs and NBFCs with an asset size above a specified threshold with public-facing business, giving customers of larger NBFCs a formal escalation route beyond the company's own internal grievance cell.
9 Scale Based Regulation (SBR)
Oct 2022SBR framework effective date
RBI's Scale Based Regulation (SBR) framework replaces a largely uniform NBFC rulebook with a four-layered, risk-proportionate structure â regulatory intensity rises with an NBFC's systemic footprint.
Top Layer (NBFC-TL) Explicit regulatory discretion â bank-like supervision if warranted
Upper Layer (NBFC-UL) ~25-50 largest NBFCs by size/risk â enhanced, bank-like prudential norms
Base Layer (NBFC-BL) Smaller, non-deposit-taking NBFCs â lightest-touch regulation
Why SBR Was Introduced
Post-IL&FS, RBI recognised some NBFCs had become systemically important â large enough that their failure could threaten financial stability, much like a bank.
SBR applies progressively stricter capital, governance, and disclosure norms as an NBFC moves up the layers, with the Upper Layer facing near-bank-equivalent prudential regulation.
RBI publishes and periodically updates the list of NBFC-Upper Layer entities.
As you climb the four SBR layers â Base, Middle, Upper, Top â regulatory scrutiny climbs with it, approaching bank-level intensity at the top.
â Key Takeaways
NBFCs lend/invest like banks but cannot accept demand deposits or join the payment system; their deposits are not DICGC-insured.
Chiefly regulated by RBI (Chapter IIIB, RBI Act); specific segments fall to SEBI, IRDAI or state governments.
Split by liability into NBFC-D (deposit-taking, minority) and NBFC-ND (majority); by activity into ICC, MFI, Factor, IFC, IDF, CIC, HFC, AA, P2P and more.
NOF strips out excess group/subsidiary investments from Owned Funds â a key registration threshold.
The 2018 IL&FS crisis triggered tighter bank exposure limits to NBFCs and, ultimately, the Scale Based Regulation framework (Oct 2022) â Base/Middle/Upper/Top layers, with the Upper Layer facing near-bank-level norms.
NBFC customers can escalate unresolved grievances to RBI's Integrated Ombudsman Scheme, 2021 for eligible NBFCs.
đ Top 50 JAIIB-Style MCQs on NBFCs
Test your understanding with these 50 practice MCQs, closely modelled on the JAIIB (IE & IFS) exam pattern. Each question has 5 options â the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
đĸ Meaning of NBFC
1 The single most important feature that legally distinguishes an NBFC from a bank is that an NBFC cannot:
A. Lend money
B. Accept demand deposits withdrawable by cheque
C. Employ staff
D. Earn profit
E. Register with RBI
Answer: B. NBFCs cannot accept demand deposits withdrawable by cheque.
2 Are NBFC deposits covered by DICGC insurance?
A. Yes, fully, up to âš5 lakh
B. No, NBFC deposits are not DICGC-insured
C. Only for NBFC-MFIs
D. Only for foreign NBFCs
E. Yes, but only up to âš1 lakh
Answer: B. NBFC deposits are not covered by DICGC insurance.
3 NBFCs are chiefly governed under which chapter of the RBI Act, 1934?
A. Chapter I
B. Chapter II
C. Chapter IIIB
D. Chapter IV
E. Chapter V
Answer: C. NBFCs are governed under Chapter IIIB of the RBI Act.
4 Is a company whose principal business is agriculture or the sale of immovable property classified as an NBFC?
A. Yes, always
B. No â such companies are specifically excluded from the NBFC definition
C. Only if it has bank finance
D. Only if listed
E. Only if foreign-owned
Answer: B. Agriculture/industry/immovable-property companies are excluded from the NBFC definition.
đ°ī¸ Evolution & Role
5 The 2018 default that triggered a major NBFC-sector liquidity crisis and prompted tighter RBI regulation involved:
A. Yes Bank
B. IL&FS
C. PMC Bank
D. Satyam
E. Lehman Brothers
Answer: B. The 2018 IL&FS default triggered the NBFC liquidity crisis.
6 NBFCs promote inclusive growth mainly by:
A. Issuing currency notes
B. Providing last-mile credit to segments banks find costly to serve directly
C. Setting the repo rate
D. Regulating insurance companies
E. Printing government bonds
Answer: B. NBFCs extend last-mile credit reach.
7 Under RBI's co-lending model, NBFCs typically:
A. Originate/service loans that banks partly fund
B. Are entirely excluded from partnering with banks
C. Only lend to other NBFCs
D. Take over all bank operations
E. Cannot lend to MSMEs
Answer: A. Co-lending blends NBFC origination with bank-scale funding.
đ Regulators of NBFCs
8 Housing Finance Companies (HFCs), previously regulated by NHB, are now regulated by:
A. SEBI
B. RBI
C. IRDAI
D. PFRDA
E. Ministry of Corporate Affairs
Answer: B. RBI has regulated HFCs since 2019.
9 Chit fund companies are primarily regulated by:
A. RBI
B. Respective State Governments
C. SEBI
D. IRDAI
E. PFRDA
Answer: B. Chit funds are regulated at the state level.
10 Merchant banking/stockbroking NBFCs are primarily regulated by:
A. RBI
B. SEBI
C. IRDAI
D. NABARD
E. NHB
Answer: B. SEBI regulates merchant banking/stockbroking entities.
đ Classification & Types
11 The majority of NBFCs in India fall under which liability category?
A. NBFC-D (deposit-taking)
B. NBFC-ND (non-deposit-taking)
C. Only NBFC-MFI
D. Only NBFC-Factor
E. Only foreign-owned NBFCs
Answer: B. Most NBFCs are non-deposit-taking (NBFC-ND).
12 In 2019, RBI merged Asset Finance, Loan and Investment Company categories into a single category called:
A. NBFC-Factor
B. NBFC-Investment and Credit Company (ICC)
C. NBFC-IDF
D. NBFC-AA
E. NBFC-CIC
Answer: B. These were merged into the NBFC-ICC category.
13 An NBFC that holds shares/investments primarily in its own group companies is classified as a:
A. Core Investment Company (CIC)
B. NBFC-Factor
C. NBFC-P2P
D. NBFC-AA
E. IDF-NBFC
Answer: A. A CIC holds investments primarily in group companies.
14 An NBFC engaged in receivables financing (buying trade receivables at a discount) is classified as:
A. NBFC-Factor
B. NBFC-MFI
C. NBFC-CIC
D. NBFC-P2P
E. NBFC-AA
Answer: A. Factoring/receivables financing defines an NBFC-Factor.
15 An NBFC-Account Aggregator (NBFC-AA) is primarily engaged in:
A. Direct lending to consumers
B. Consent-based sharing of financial data between institutions, with no lending
C. Peer-to-peer lending
D. Infrastructure project finance
E. Factoring receivables
Answer: B. NBFC-AAs facilitate consent-based data sharing, not lending.
16 An Infrastructure Debt Fund (IDF-NBFC) primarily refinances:
A. Pre-construction infrastructure projects
B. Post-commissioning (operational) infrastructure projects via long-term bonds
C. Retail personal loans
D. Gold loans
E. Credit card receivables
Answer: B. IDF-NBFCs refinance operational infrastructure projects.
17 An NBFC-Infrastructure Finance Company (NBFC-IFC) must have what minimum share of assets deployed in infrastructure loans?
A. 25%
B. 50%
C. 75%
D. 90%
E. 100%
Answer: C. NBFC-IFCs must hold at least 75% of assets in infrastructure loans.
đ° Owned Funds & NOF
18 "Owned Funds" of an NBFC primarily comprise:
A. Customer deposits
B. Paid-up equity capital plus free reserves and share premium, minus accumulated losses
C. Bank borrowings only
D. Government grants
E. Customer loan receivables
Answer: B. Owned Funds = paid-up capital + free reserves + premium, less losses.
19 Net Owned Funds (NOF) is calculated by deducting from Owned Funds:
A. Staff salaries
B. Excess investments in/loans to group/subsidiary companies beyond a 10% threshold
C. Government taxes paid
D. Marketing expenses
E. Nothing; NOF equals Owned Funds always
Answer: B. NOF nets out excess group/subsidiary exposure.
20 The purpose of computing NOF (rather than just Owned Funds) is to:
A. Prevent NBFCs from inflating apparent capital via circular group holdings
B. Increase an NBFC's reported profit
C. Reduce RBI's supervisory burden entirely
D. Eliminate the need for any capital requirement
E. Allow unlimited deposit-taking
Answer: A. NOF prevents inflation of capital through group-company circularity.
21 A minimum NOF is required for:
A. Filing income tax returns only
B. Registration of a company as an NBFC with RBI
C. Opening a savings account
D. Listing on a stock exchange only
E. None of the above
Answer: B. A minimum NOF is a precondition for NBFC registration.
đĻ Bank Finance to NBFCs
22 Bank credit extended to NBFCs for on-lending can, subject to conditions, be classified as:
A. Non-priority sector lending only
B. Priority Sector Lending in specified categories
C. Capital market exposure only
D. Real estate exposure only
E. Sovereign exposure
Answer: B. Bank finance to NBFCs for on-lending can count toward PSL, subject to conditions.
23 Following the IL&FS crisis, RBI's response on banks' NBFC exposure was to:
A. Remove all exposure limits
B. Tighten single/group exposure limits to NBFCs
C. Ban banks from lending to NBFCs entirely
D. Merge all NBFCs into banks
E. Abolish NBFC regulation
Answer: B. RBI tightened exposure limits after the IL&FS episode.
đ¤ Fair Practice Code & Ombudsman
24 NBFCs are required to adopt a Fair Practice Code that is:
A. Optional and unregulated
B. Board-approved, covering transparent pricing and non-coercive recovery
C. Set entirely by a third-party rating agency
D. Only applicable to foreign NBFCs
E. Identical to SEBI's listing rules
Answer: B. NBFCs must adopt a board-approved Fair Practice Code.
25 RBI's Integrated Ombudsman Scheme, extending grievance redressal to NBFCs, took effect in:
A. 2011
B. 2018
C. 2021
D. 2022
E. 2004
Answer: C. The Integrated Ombudsman Scheme launched in 2021.
26 RBI's Ombudsman Scheme applies to which category of NBFCs?
A. All NBFCs without exception
B. Deposit-taking NBFCs and NBFCs above a specified asset-size threshold with public-facing business
C. Only foreign NBFCs
D. Only NBFC-AAs
E. No NBFCs â banks only
Answer: B. Coverage extends to deposit-taking NBFCs and larger, customer-facing NBFCs.
đ Scale Based Regulation (SBR)
27 RBI's Scale Based Regulation (SBR) framework for NBFCs became effective from:
A. April 2019
B. October 2022
C. April 2011
D. January 2021
E. October 2018
Answer: B. SBR became effective from October 2022.
28 SBR classifies NBFCs into how many regulatory layers?
A. 2
B. 3
C. 4
D. 5
E. 6
Answer: C. SBR has 4 layers â Base, Middle, Upper, Top.
29 The four SBR layers, from lightest to strictest regulation, are:
A. Top â Upper â Middle â Base
B. Base â Middle â Upper â Top
C. Middle â Base â Top â Upper
D. Upper â Base â Top â Middle
E. All four layers carry identical regulation
Answer: B. Regulation intensifies from Base to Middle to Upper to Top.
30 The NBFC layer facing near-bank-equivalent prudential regulation under SBR is the:
A. Base Layer
B. Middle Layer
C. Upper Layer
D. None; SBR treats all NBFCs identically
E. Only foreign NBFCs
Answer: C. The Upper Layer faces bank-like enhanced regulation.
31 The "Top Layer" under SBR is:
A. Permanently populated with the same NBFCs every year
B. Reserved for NBFCs RBI deems to pose exceptionally high systemic risk â populated at RBI's discretion, potentially even empty
C. The lightest-regulated layer
D. Applicable only to deposit-taking NBFCs
E. Applicable only to foreign banks
Answer: B. The Top Layer is a discretionary, exceptional-risk category.
32 All deposit-taking NBFCs (NBFC-D), regardless of size, are placed under SBR in at least which layer?
A. Base Layer
B. Middle Layer
C. Top Layer only
D. They are exempt from SBR
E. Upper Layer only
Answer: B. Deposit-taking NBFCs are placed at least in the Middle Layer.
𧊠Mixed / Comprehensive
33 Which of the following is a key reason NBFCs can often lend faster than banks?
A. They are exempt from all RBI regulation
B. Leaner processes and sector-specific underwriting expertise
C. They accept unlimited public deposits
D. They have access to CRR/SLR exemptions that eliminate all risk
E. They are guaranteed by RBI
Answer: B. Leaner processes and niche expertise enable faster NBFC lending.
34 Prior to the SBR framework, NBFC regulation was largely:
A. Already fully risk-layered by size
B. Relatively uniform across most NBFCs, regardless of size/systemic footprint
C. Identical to bank regulation in every respect
D. Non-existent
E. Set entirely by SEBI
Answer: B. Pre-SBR regulation was relatively uniform, not risk-layered.
35 Which of these is an accurate NBFC-type-to-activity match?
A. NBFC-P2P â infrastructure lending
B. NBFC-P2P â peer-to-peer lending platform
C. NBFC-CIC â factoring
D. NBFC-IFC â account aggregation
E. NBFC-AA â microfinance
Answer: B. NBFC-P2P correctly refers to peer-to-peer lending.
36 Which of the following would most likely fall under an NBFC-ICC (Investment and Credit Company)?
A. A company purely aggregating account data with no lending
B. A company primarily engaged in general lending and investment activity, not fitting a narrower NBFC category
C. A peer-to-peer platform only
D. A core investment holding company only
E. A chit fund
Answer: B. NBFC-ICC is the broad catch-all lending/investment category.
37 Which statement about the relationship between NBFCs and payment systems is correct?
A. NBFCs are fully part of the cheque/payment clearing system, identical to banks
B. NBFCs are not part of the payment and settlement system in the way banks are
C. Only foreign NBFCs can join payment systems
D. NBFCs issue their own currency
E. There is no distinction between banks and NBFCs on this point
Answer: B. NBFCs are not part of the payment/settlement system the way banks are.
38 RBI publishes and periodically updates a list identifying NBFCs classified under the:
A. Base Layer only
B. Upper Layer
C. No NBFC list is ever published
D. Only foreign-owned NBFCs
E. Only NBFC-P2P entities
Answer: B. RBI publishes the list of NBFC-Upper Layer entities.
39 A CRR/SLR-style mandatory reserve requirement, in the strict banking sense, generally applies to:
A. All NBFCs equally, just like banks
B. Banks under the RBI/BR Acts; NBFCs are not subject to CRR/SLR in the same way
C. Only foreign NBFCs
D. No institution in India
E. Only NBFC-AAs
Answer: B. CRR/SLR apply to banks; NBFCs face different liquidity norms.
40 Which of the following best explains why RBI tightened NBFC oversight through SBR rather than simply converting large NBFCs into banks?
A. Large NBFCs are legally impossible to regulate
B. SBR allows risk-proportionate oversight while preserving NBFCs' distinct business models and reach
C. RBI has no authority over NBFCs at all
D. Converting NBFCs to banks is mandatory under law
E. NBFCs requested to be shut down
Answer: B. SBR preserves NBFC flexibility while scaling oversight to risk.
41 A Housing Finance Company (HFC) is best described as a specialised type of:
A. Universal Bank
B. NBFC, focused on housing/home loans
C. Payment Bank
D. Regional Rural Bank
E. Cooperative Bank
Answer: B. HFCs are a specialised category of NBFC.
42 Which of the following is NOT typically a reason a borrower might prefer an NBFC over a bank for a loan?
A. Faster turnaround time
B. Flexible/customised underwriting for niche segments
C. Access to DICGC deposit insurance on the loan itself
D. Sector-specific product expertise (e.g., vehicle finance)
E. Wider reach in underbanked areas
Answer: C. DICGC insurance is irrelevant here â it covers deposits, not loans, and doesn't apply to NBFCs anyway.
43 The Nidhi company category of NBFC-like entities is primarily regulated by:
A. RBI
B. Ministry of Corporate Affairs
C. SEBI
D. IRDAI
E. State Governments
Answer: B. Nidhi companies fall under the Ministry of Corporate Affairs.
44 Which statement correctly compares NBFC-D and NBFC-ND?
A. NBFC-D cannot accept deposits at all; NBFC-ND can accept unlimited deposits
B. NBFC-D may accept public deposits (under strict conditions); NBFC-ND cannot accept public deposits
C. Both categories are identical in every respect
D. NBFC-ND is regulated by SEBI; NBFC-D by RBI
E. Only NBFC-ND can be an NBFC-MFI
Answer: B. NBFC-D may accept deposits under RBI conditions; NBFC-ND cannot.
45 A gold loan NBFC, financing consumers against gold jewellery pledged as collateral, would typically be classified under:
A. NBFC-ICC
B. NBFC-AA
C. NBFC-P2P
D. Core Investment Company
E. IDF-NBFC
Answer: A. Gold-loan lending falls under the broad NBFC-ICC lending category.
46 Which of the following best describes RBI's overall regulatory philosophy shift for NBFCs post-2018?
A. Complete deregulation
B. Progressive convergence toward bank-like prudential norms for systemically important NBFCs
C. Transfer of all NBFC regulation to SEBI
D. Abolition of the NBFC category entirely
E. No change in approach at all
Answer: B. RBI moved toward bank-like norms for large/systemic NBFCs.
47 An NBFC's "principal business" test (used to determine if a company qualifies as an NBFC) generally examines:
A. The company's registered office address only
B. Whether financial assets/income form the predominant share of the company's total assets/income
C. The number of employees only
D. The company's logo design
E. The company's stock price
Answer: B. The principal business test looks at the share of financial assets/income.
48 Which of the following NBFC categories is most directly linked to consumer financial-data privacy/sharing (e.g., for loan applications)?
A. NBFC-Factor
B. NBFC-Account Aggregator
C. NBFC-IFC
D. NBFC-CIC
E. IDF-NBFC
Answer: B. NBFC-AAs handle consent-based financial data sharing.
49 A key benefit of SBR's tiered structure, from a systemic-risk standpoint, is that it:
A. Ignores the size of an NBFC entirely
B. Concentrates the tightest scrutiny on the NBFCs most capable of causing systemic harm if they fail
C. Applies identical rules regardless of risk
D. Removes RBI's oversight of large NBFCs
E. Only applies to foreign NBFCs
Answer: B. SBR focuses the strictest oversight on the highest-risk, largest NBFCs.
50 Overall, which statement best captures the current (2026) NBFC regulatory landscape in India?
A. Uniform, light-touch regulation for all NBFCs regardless of size
B. A risk-proportionate, four-layer Scale Based Regulation framework, with progressively bank-like norms for larger/systemic NBFCs
C. No regulation whatsoever
D. Complete merger of all NBFCs into public sector banks
E. Regulation entirely by state governments
Answer: B. This correctly summarises today's SBR-based NBFC regulatory landscape.
Disclaimer: This article is prepared for educational and exam-preparation purposes only, summarising RBI's NBFC regulatory framework as of September 2026. Candidates should cross-check the latest official IIBF syllabus and RBI's current Master Directions before the exam.