UPSC Prelims 2024 Q42: NBFCs & LAF, FPIs in G-Secs, Debt Platforms

Consider the following statements:

1. In India, Non-Banking Financial Companies can access the Liquidity Adjustment Facility window of the Reserve Bank of India.

2. In India, Foreign Institutional Investors can hold the Government Securities (G-Secs).

3. In India, Stock Exchanges can offer separate trading platforms for debts.

Which of the statements given above is/are correct?

  1. 1 and 2 only
  2. 3 only
  3. 1, 2 and 3
  4. 2 and 3 only

Answer: (c) 1, 2 and 3

Statement-wise explanation

  • 1: correct — RBI's Liquidity Adjustment Facility (LAF) is open to scheduled commercial banks (excluding Regional Rural Banks) and to Primary Dealers that hold a current account and an SGL account with RBI. Standalone Primary Dealers (SPDs) must register as NBFCs under Section 45-IA of the RBI Act, 1934. So some NBFCs, the SPDs, can use the LAF window. Ordinary NBFCs such as lending or housing finance companies cannot.
  • 2: correct — Foreign Portfolio Investors (the successor category to FIIs) can invest in Government Securities through RBI's Medium Term Framework and its Voluntary Retention Route. Since 1 April 2020 they can also use the Fully Accessible Route (FAR), under which specified Central Government securities are fully open to non-residents with no investment ceiling. FAR bonds are the securities JP Morgan added to its emerging-market bond index from 28 June 2024.
  • 3: correct — In January 2013, SEBI issued guidelines that let stock exchanges set up a dedicated Debt Segment. It has separate trading, clearing, settlement and reporting arrangements and separate membership. The segment covers corporate bonds, G-Secs, T-Bills, State Development Loans and securitised debt, with retail and institutional platforms. SEBI later required exchanges to run Request for Quote (RFQ) platforms for listed debt.

How to eliminate

Statements 2 and 3 can be settled from current affairs. JP Morgan's index inclusion of Indian G-Secs in 2023–24 was widely reported, and it only makes sense if foreign investors can hold G-Secs. NSE and BSE also run well-known bond platforms. That leaves two options: 'd' (2 and 3 only) and 'c' (all three). Everything then turns on Statement 1. Most candidates know that 'banks borrow from RBI under LAF' and mark it wrong. The fact to remember: Standalone Primary Dealers are NBFCs registered with RBI, and they have LAF access. So the general claim that NBFCs can access LAF holds. Watch the wording: the statement does not say 'all NBFCs', so one eligible NBFC category is enough to make it true. Without the SPD fact, this question cannot be solved by logic alone.

Know more

Who can borrow from or park money with RBI?

The Liquidity Adjustment Facility (LAF) is RBI's daily tool for managing liquidity. It includes repo and reverse repo, variable-rate auctions (VRR/VRRR), and the standing facilities (SDF at the floor, MSF at the ceiling). Each LAF transaction is collateralised by G-Secs. That is why access is limited to institutions that hold G-Secs in an SGL account with RBI.

Participant LAF access? Basis
Scheduled commercial banks (excluding RRBs) Yes Core LAF participants
Standalone Primary Dealers Yes Registered as NBFCs (Sec 45-IA) and authorised to deal in G-Secs
Other NBFCs (lending, HFCs, MFIs) No Borrow from banks and markets instead
Regional Rural Banks No Excluded from LAF

Primary Dealers (PDs) underwrite and bid in G-Sec auctions and act as market makers. They are either bank departments or standalone NBFCs. Standalone PDs need minimum Net Owned Funds of ₹150 crore (₹250 crore if they also take on non-core activities).

Foreign money in G-Secs comes through three routes:

  • General route (MTF): subject to investment limits.
  • Voluntary Retention Route: investors commit to keep a share of their investment in India for a minimum period, in return for relaxed norms.
  • Fully Accessible Route: in place since April 2020, with no ceiling on specified securities.

FAR bonds are what global index providers include in their indices.

Debt on stock exchanges: since SEBI's 2013 guidelines, exchanges can run a separate debt segment. Retail investors can also buy G-Secs directly through RBI Retail Direct and through exchange platforms.

In the news

JP Morgan announced in September 2023 that it would add Indian Government Bonds under the Fully Accessible Route to its emerging-market bond index, starting on 28 June 2024. That put foreign holding of G-Secs in the news just before Prelims 2024.

NCERT Concepts to Revise

  • Liquidity Adjustment Facility: Statement 1 asks who may use this window, so you need to know what the LAF includes and how it works.
  • Non-Banking Financial Company: Statement 1 depends on what counts as an NBFC under RBI registration, and whether some NBFCs have special roles.
  • Repo rate: Repo is the main LAF operation. It is secured against G-Secs, which links Statements 1 and 2.
  • Policy rate corridor: The LAF corridor shows the full set of LAF tools that eligible participants can use.
  • Marginal Standing Facility: MSF is the upper standing facility in the LAF. Eligibility for it is a frequent UPSC trap.

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