UPSC Prelims 2026 Q99: NBFCs vs Banks, RBI Rules & DICGC — Explained
Consider the following statements about the Non-Banking Financial Companies (NBFCs) in India:
1. NBFCs cannot accept demand deposits.
2. All the NBFCs operating in India have to be registered with the RBI.
3. NBFCs form part of the payment and settlement system and can issue cheque drawn on itself.
4. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to the depositors of deposit taking NBFCs.
Which of the statements given above is/are correct?
- 1 and 4
- 1, 2 and 3
- 4 only
- 2, 3 and 4
Answer: (a) 1 and 4
Statement-wise explanation
- 1: correct — Demand deposits are savings and current account balances that the holder can withdraw at any time. The RBI's FAQ on NBFCs lists 'NBFCs cannot accept demand deposits' as one of the main ways NBFCs differ from banks. A deposit-taking NBFC may accept only term deposits, for 12 to 60 months.
- 2: incorrect — An NBFC that meets the principal business criteria must register with the RBI under the RBI Act, 1934, but some NBFCs are exempt because another regulator covers them. The exempt categories include merchant bankers, stock brokers and Alternative Investment Funds registered with SEBI, insurance companies registered with IRDA, Nidhi companies and chit fund companies. Because of these exemptions, the word 'All' makes the statement false.
- 3: incorrect — The RBI's FAQ says the opposite: NBFCs 'do not form part of the payment and settlement system and cannot issue cheques drawn on itself.' Only banks can run the cheque-based accounts that sit inside the clearing system.
- 4: correct — The RBI's FAQ says the DICGC deposit insurance facility 'is not available to depositors of deposit taking NBFCs'. DICGC insures deposits only in banks, including cooperative banks, up to ₹5 lakh per depositor per bank. An NBFC fixed deposit has no such cover.
How to eliminate
This question repeats the RBI's own list of differences between banks and NBFCs almost word for word. If you know that list, you can solve it in seconds. Without it, start with Statement 2. The word 'All' should make you think of exemptions, and you probably know that Nidhi companies, chit funds and insurers are not regulated by the RBI. That removes the options containing 2, leaving '1 and 4' and '4 only'. Statement 3 then hardly matters. If NBFCs could issue cheques on themselves, they would effectively be banks. Between the two remaining options, Statement 1 decides the answer. If NBFCs could take savings or current account money, they would be doing a bank's core business. So both 1 and 4 are true. The fact to remember is the RBI's three-point difference: no demand deposits, no cheques or payment-system membership, and no DICGC cover.
Know more
NBFC vs bank: what the law allows
An NBFC is a company registered under the Companies Act whose principal business is lending, investing, leasing or hire purchase. It does the same credit intermediation as a bank but does not hold a banking licence under the Banking Regulation Act, 1949. The RBI registers and regulates most NBFCs under Chapter IIIB of the RBI Act, 1934.
| Feature | Bank | NBFC |
|---|---|---|
| Demand deposits (savings/current) | Yes | No |
| Term deposits | Yes | Only deposit-taking NBFCs with an investment-grade rating, up to 1.5 times their Net Owned Funds, for 12–60 months |
| Cheques drawn on itself / payment system membership | Yes | No |
| DICGC insurance | Yes (up to ₹5 lakh) | No |
The RBI has not given a new NBFC a Certificate of Registration to accept public deposits since 1997. Most NBFCs therefore raise money from banks, bonds and commercial paper. This is why they are called part of the 'shadow banking' system.
Not every NBFC is regulated by the RBI. Merchant bankers, stock brokers and AIFs (regulated by SEBI), insurance companies (IRDAI), Nidhi companies (Ministry of Corporate Affairs) and chit funds (state governments) are exempt from RBI registration.
Scale-Based Regulation (from 1 October 2022). The RBI places NBFCs in four layers:
- Base Layer: non-deposit-taking NBFCs with assets below ₹1,000 crore, P2P platforms and Account Aggregators.
- Middle Layer: all deposit-taking NBFCs, non-deposit-taking NBFCs with assets of ₹1,000 crore or more, and Core Investment Companies.
- Upper Layer: NBFCs the RBI names using a scoring method. The top ten by asset size are always included.
- Top Layer: kept empty unless the RBI sees a sharp rise in systemic risk.
NCERT Concepts to Revise
- Non-Banking Financial Company: Every statement depends on what legally counts as an NBFC and how it differs from a bank.
- Demand deposits: Statement 1 asks whether NBFCs may hold savings and current account money.
- Scale-based regulation: The RBI's layered framework shows which NBFCs it registers and supervises, which bears on Statement 2.
- Shadow banking: NBFCs lend like banks without being part of the payment system or deposit insurance, which bears on Statements 3 and 4.
- Deposits: Statement 4 depends on which kinds of deposits DICGC insurance actually covers.