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IIBF NBFC practice questions

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Question 1NBFC Regulatory Framework (RBI Directions and Applicable Law)

Under the RBI's scale-based regulation, an NBFC that qualifies as an NBFC-BL (Base Layer) must maintain which minimum net owned fund?

  1. ₹10 crore
  2. ₹1 crore
  3. ₹2 crore Correct answer.
  4. ₹5 crore

Explanation

The October 2021 scale-based framework sets the entry-level net owned fund for Base Layer NBFCs at ₹2 crore, replacing the earlier ₹1 crore for non-deposit-taking NBFCs. Higher layers carry higher NOF thresholds, and the ₹2 crore figure is the floor for the base layer.

Question 2NBFC Regulatory Framework (RBI Directions and Applicable Law)

Which of the following activities disqualifies an entity from being classified as an NBFC under Section 45-I of the RBI Act, 1934?

  1. Insurance business regulated under the Insurance Act Correct answer.
  2. Lending against the security of gold ornaments
  3. Financing the acquisition of immovable property
  4. Hire-purchase of commercial vehicles

Explanation

Section 45-I(f) carves out institutions carrying on insurance business and certain other regulated activities from the definition of a non-banking financial company. Insurance is regulated by IRDAI under its own statute, so an insurer is not an NBFC. Lending, hire-purchase and property financing are core NBFC activities.

Question 3NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC-MFI's qualifying assets must constitute at least what proportion of its total assets?

  1. 50 per cent
  2. 75 per cent
  3. 60 per cent
  4. 85 per cent Correct answer.

Explanation

The RBI Directions for microfinance require a qualifying asset share of not less than 85 per cent of total assets for an NBFC-MFI. This ensures the entity remains predominantly engaged in microfinance rather than diversifying into unrelated lending.

Question 4NBFC Regulatory Framework (RBI Directions and Applicable Law)

The maximum permissible loan amount per borrower for an NBFC-MFI under the microfinance directions is governed by which ceiling?

  1. ₹1,25,000 for the first cycle and ₹2,00,000 thereafter
  2. ₹50,000 for the first cycle and ₹1,00,000 thereafter
  3. ₹2,00,000 for the first cycle and ₹3,00,000 thereafter
  4. ₹1,00,000 for the first cycle and ₹1,50,000 thereafter Correct answer.

Explanation

The revised microfinance framework permits an NBFC-MFI to lend up to ₹1,00,000 to a borrower in the first loan cycle and up to ₹1,50,000 in subsequent cycles, subject to the household income limits. These caps are independent of the income-based eligibility criteria.

Question 5NBFC Regulatory Framework (RBI Directions and Applicable Law)

For an NBFC-UL, what is the maximum period for which an exposure to a single counterparty may remain above the large exposure limit without regulatory approval?

  1. 90 days Correct answer.
  2. 180 days
  3. 60 days
  4. 30 days

Explanation

The large exposure framework allows an NBFC-Upper Layer exposure to exceed the single-counterparty limit for a maximum of 90 days before it must be reported and regularised. Beyond this window the breach must be addressed under the prescribed remediation process.

Question 6NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC that holds customer assets in a demat capacity must segregate the securities of clients under which requirement?

  1. Only on the direction of SEBI
  2. By maintaining a separate client securities account and not mixing them with own holdings Correct answer.
  3. By depositing them with the RBI
  4. Only if the NBFC is listed

Explanation

Client securities must be held in a separate account and kept distinct from the NBFC's own holdings, reflecting the fiduciary nature of the custody relationship. Commingling client and proprietary securities is treated as a serious governance failure.

Question 7NBFC Regulatory Framework (RBI Directions and Applicable Law)

Which committee must an NBFC-MFI constitute to review the income and indebtedness of microfinance borrowers?

  1. Audit Committee of the Board
  2. Local Level Committee
  3. Credit Approval Committee
  4. Fair Practices Code Committee Correct answer.

Explanation

NBFC-MFIs are required to have a Fair Practices Code and a committee to monitor compliance with pricing, income and indebtedness norms. This committee reviews borrower-level eligibility and grievance redressal.

Question 8NBFC Regulatory Framework (RBI Directions and Applicable Law)

Under the RBI's principal business criteria, an NBFC must derive at least what share of its total assets from financial activity?

  1. 80 per cent
  2. 60 per cent
  3. 50 per cent Correct answer.
  4. 75 per cent

Explanation

The principal business test requires that financial assets constitute more than 50 per cent of total assets and that income from financial activity exceed 50 per cent of gross income. Both limbs must be satisfied for the entity to be treated as an NBFC.

Question 9NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC-BL proposes to change its name. What is the correct regulatory step?

  1. No approval is needed if the change is only cosmetic
  2. Only the Registrar of Companies approval is required
  3. Post-facto intimation within 30 days is sufficient
  4. Prior written approval of the RBI is required Correct answer.

Explanation

An NBFC must obtain the RBI's prior written approval before changing its name, and a fresh certificate of registration is issued where the change is approved. The Companies Act process with the Registrar runs in parallel but does not substitute for RBI approval.

Question 10NBFC Regulatory Framework (RBI Directions and Applicable Law)

What is the maximum rate of interest an NBFC-MFI may charge a borrower, expressed under the current framework?

  1. A flat 24 per cent irrespective of the base rate
  2. The higher of 30 per cent or the bank rate plus 10 per cent
  3. A flat 36 per cent with no reference to any benchmark
  4. The lower of 26 per cent or the average base rate of the five largest commercial banks multiplied by 2.75 Correct answer.

Explanation

The pricing cap for NBFC-MFIs is the lower of 26 per cent per annum or 2.75 times the average of the base rates of the five largest commercial banks. The reference to the banking system's base rate ensures the cap moves with market conditions.

Question 11NBFC Regulatory Framework (RBI Directions and Applicable Law)

Under the RBI fair practices directions, by what time must an NBFC communicate its decision on a loan application to the borrower?

  1. Within 30 days of receipt Correct answer.
  2. No timeline is prescribed
  3. Within 7 days of receipt
  4. Within 90 days of receipt

Explanation

The Fair Practices Code requires an NBFC to convey its decision on a loan application within 30 days of receipt, together with the reasons for rejection where applicable. This supports transparency and enables the borrower to seek redressal.

Question 12NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC appoints a statutory auditor. Within what period must the appointment be reported to the RBI?

  1. Within 90 days of the annual general meeting
  2. Within 30 days of the annual general meeting Correct answer.
  3. Within 15 days of the annual general meeting
  4. Within 60 days of the annual general meeting

Explanation

The NBFC must inform the RBI of the statutory auditor appointed at the annual general meeting within 30 days of that meeting, along with the prescribed particulars. This allows the supervisor to track audit coverage across the sector.

Question 13NBFC Regulatory Framework (RBI Directions and Applicable Law)

Which of the following best describes the role of the RBI's Sachet portal in the NBFC context?

  1. It is the online system for filing NBFC registration applications
  2. It is a repository of NBFC audited financial statements
  3. It is a public portal for reporting unauthorised deposit-taking and lending schemes Correct answer.
  4. It is a database of borrower credit information

Explanation

Sachet is a portal that allows the public to report unauthorised deposit acceptance and illegal financial schemes, including those run by entities posing as NBFCs. It complements supervisory action against unregistered entities.

Question 14NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC-ICC wants to pay a dividend on equity shares. Which condition must be satisfied before declaring the dividend?

  1. It must maintain a minimum capital adequacy of 10 per cent only
  2. It must have no non-performing assets at all
  3. It must have earned net profit for the immediately preceding three consecutive years Correct answer.
  4. It must obtain prior RBI approval for every dividend declaration

Explanation

Dividend declaration by an NBFC-ICC requires net profit in each of the immediately preceding three consecutive years, among other conditions relating to capital adequacy and NPAs. These conditions ensure that distributions do not erode the capital base.

Question 15NBFC Regulatory Framework (RBI Directions and Applicable Law)

Under the RBI's norms on securitisation, what is the minimum retention requirement for the originator of securitised assets?

  1. 15 per cent of the book value of the assets securitised
  2. 10 per cent of the book value of the assets securitised Correct answer.
  3. 5 per cent of the book value of the assets securitised
  4. 20 per cent of the book value of the assets securitised

Explanation

The originator must retain a minimum of 10 per cent of the book value of the assets securitised, providing skin in the game. This aligns the originator's incentives with the performance of the pooled assets.

Question 16NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC extends a loan and charges a prepayment penalty on a floating-rate loan to an individual borrower. How is this treated under the fair practices framework?

  1. It is permitted only if the loan exceeds ₹5 lakh
  2. It is prohibited for floating-rate loans to individual borrowers Correct answer.
  3. It is permitted if disclosed in the loan agreement
  4. It is permitted only with the RBI's prior approval

Explanation

The fair practices framework bars NBFCs from levying prepayment penalties on floating-rate loans extended to individual borrowers. This mirrors the position for banks and supports borrower mobility.

Question 17NBFC Regulatory Framework (RBI Directions and Applicable Law)

Which of the following is a core function of an NBFC's asset-liability management committee?

  1. Approving individual large loans
  2. Finalising the annual financial statements
  3. Monitoring liquidity and interest rate risk within board-approved limits Correct answer.
  4. Setting the statutory auditor's remuneration

Explanation

The ALM committee monitors liquidity gaps, interest rate sensitivity and funding concentration within limits set by the board. It is a risk oversight body rather than a sanctioning or financial-reporting authority.

Question 18NBFC Regulatory Framework (RBI Directions and Applicable Law)

An unregistered entity is accepting deposits and representing itself as an NBFC. What is the RBI's power in such a case?

  1. It must refer the matter to SEBI
  2. It can act only after a court conviction
  3. It can direct the entity to stop accepting deposits and initiate action under the RBI Act Correct answer.
  4. It can only issue a caution notice to the public

Explanation

The RBI can direct an unauthorised entity to cease accepting deposits and can initiate penal and prosecution action under the RBI Act. It also publishes cautionary lists to warn the public.

Question 19NBFC Regulatory Framework (RBI Directions and Applicable Law)

What is the maximum period for which an NBFC may hold a repossessed asset acquired in satisfaction of a debt?

  1. 12 years
  2. 7 years Correct answer.
  3. 5 years
  4. 3 years

Explanation

An NBFC may hold a repossessed or acquired asset in satisfaction of a debt for a maximum of seven years, after which it must be disposed of. This prevents indefinite warehousing of non-financial assets on the balance sheet.

Question 20NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC-ICC has total assets of ₹600 crore. Which classification applies to it under the scale-based framework?

  1. Upper Layer
  2. Middle Layer Correct answer.
  3. Base Layer
  4. Top Layer

Explanation

The Middle Layer captures NBFC-ICCs with total assets of ₹1,000 crore or less but above the base-layer threshold, along with other specified categories. A ₹600 crore ICC falls in this band rather than the base layer.

Question 21NBFC Regulatory Framework (RBI Directions and Applicable Law)

Under the RBI directions, an NBFC must display which information at its place of business?

  1. Its list of borrowers
  2. A copy of the certificate of registration Correct answer.
  3. Its internal audit report
  4. Its board resolution on lending policy

Explanation

Every NBFC must display a copy of its certificate of registration at its registered office and place of business, allowing the public to verify its status. This is a key protection against entities falsely claiming NBFC status.

Question 22NBFC Regulatory Framework (RBI Directions and Applicable Law)

What does the RBI's 'fit and proper' criterion apply to in the NBFC context?

  1. Only to the depositors
  2. To directors and senior management of the NBFC Correct answer.
  3. Only to the borrowers
  4. Only to the statutory auditor

Explanation

The fit and proper criterion applies to directors and senior management, assessing their integrity, competence and track record. Compliance with this criterion is a condition of registration and a governance requirement.

Question 23NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC wants to open a branch in a new state. What is the current regulatory position?

  1. Prior RBI approval is required for each branch
  2. Branches may be opened only in the same state as the registered office
  3. Branches may be opened without prior RBI approval, subject to intimation requirements Correct answer.
  4. Branch opening is prohibited for base-layer NBFCs

Explanation

NBFCs may open branches without prior RBI approval, subject to prescribed intimation and reporting requirements. The earlier branch-licensing regime has been relaxed for non-deposit-taking NBFCs.

Question 24NBFC Regulatory Framework (RBI Directions and Applicable Law)

Which of the following is the correct consequence of an NBFC failing to maintain the minimum net owned fund?

  1. The NBFC's directors are automatically disqualified for life
  2. The NBFC is automatically liquidated by the RBI
  3. The NBFC is converted into a bank
  4. The RBI may impose corrective action, including restrictions on business and a direction to restore NOF Correct answer.

Explanation

A shortfall in net owned fund invites supervisory action, which can include business restrictions and a requirement to restore NOF within a specified period. The RBI's response is graduated rather than automatic liquidation.

Question 25NBFC Regulatory Framework (RBI Directions and Applicable Law)

Which of the following correctly describes the RBI's power to inspect an NBFC?

  1. Inspection is limited to deposit-taking NBFCs
  2. The RBI may inspect at any time and may direct the NBFC to produce books and records Correct answer.
  3. Inspection requires the NBFC's prior consent
  4. Inspection is limited to the annual audit cycle

Explanation

The RBI has statutory power to inspect an NBFC and to require production of books, accounts and records. The power is not restricted to a particular annual cycle or to deposit-taking entities.

Question 26NBFC Regulatory Framework (RBI Directions and Applicable Law)

Under the RBI scale-based regulatory framework, an NBFC-ICC with total assets of ₹1,200 crore at the last audited balance sheet falls in which layer?

  1. Top Layer
  2. Upper Layer
  3. Middle Layer Correct answer.
  4. Base Layer

Explanation

Under the scale-based framework, NBFCs with total assets of ₹1,000 crore and above but below ₹10,000 crore are placed in the Middle Layer, subject to the specified carve-outs. Base Layer covers smaller NBFCs below the ₹1,000 crore threshold. Upper Layer is reserved for NBFCs specifically identified by the RBI based on size, complexity and supervisory concerns.

Question 27NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC-NBFC-MFI under the harmonised microfinance directions is required to maintain what proportion of its total assets as qualifying microfinance assets?

  1. At least 75 per cent
  2. At least 85 per cent Correct answer.
  3. At least 50 per cent
  4. At least 95 per cent

Explanation

The RBI's harmonised microfinance directions require an NBFC-MFI to hold not less than 85 per cent of its total assets as qualifying microfinance assets. This ensures the entity remains principally engaged in microfinance rather than diverting funds to other lending. The threshold is a continuing condition, not merely a licensing criterion.

Question 28NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC-ICC is approached by a borrower who wants a loan against gold ornaments. Which regulatory characterisation best fits this activity?

  1. It is prohibited for NBFC-ICCs and requires a separate NBFC licence category
  2. It is permitted as a secured loan, with the ornaments held as collateral under documented custody arrangements Correct answer.
  3. It is permitted only if the NBFC converts into a bank
  4. It is permitted only for NBFCs with an asset size above ₹5,000 crore

Explanation

Lending against the security of gold ornaments is a form of secured lending and is within the permitted business of an NBFC-ICC, provided custody, valuation and auction procedures are documented. It does not require converting into a bank or a separate licence solely for that purpose. The RBI's concern is that the entity does not accept deposits or carry on banking business.

Question 29NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC fails to repay a public deposit together with interest on the due date. Under the RBI directions, what is the primary consequence for the entity?

  1. It may convert the overdue deposit into equity shares without depositor consent
  2. It may continue accepting fresh deposits if it informs the RBI
  3. It becomes disqualified from accepting deposits and must repay the overdue amount with the prescribed additional interest Correct answer.
  4. It faces no consequence if the delay is under one year

Explanation

An NBFC that fails to repay a deposit or interest on maturity is treated as having defaulted and is barred from accepting fresh deposits. It must also pay additional interest on the overdue amount at the prescribed rate for the period of default. Continued acceptance of deposits after such default would breach the deposit directions.

Question 30NBFC Regulatory Framework (RBI Directions and Applicable Law)

Which of the following statements correctly describes the RBI's power over the management of an NBFC where it is satisfied that the entity is being managed in a manner detrimental to depositors?

  1. The RBI may remove or supersede the board and appoint an administrator Correct answer.
  2. The RBI may act only after the NBFC's annual general meeting approves it
  3. The RBI must first obtain a court decree before any action
  4. The RBI may only issue an advisory letter with no binding effect

Explanation

The RBI Act confers powers on the RBI, in specified circumstances, to remove directors, supersede the board and appoint an administrator for an NBFC. These powers are exercised to protect depositors and the public interest. They are administrative powers and do not require a prior court decree or shareholder approval.

Question 31NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC wants to hedge its interest rate exposure on a portfolio of fixed-rate loans using an interest rate swap. Which statement best reflects the regulatory position?

  1. Derivative transactions are permitted only for hedging own balance sheet risk, subject to the RBI's derivative directions Correct answer.
  2. Derivatives are prohibited for all NBFCs
  3. Derivatives may be used freely for proprietary trading by any NBFC
  4. Derivatives require prior approval of each counterparty's board

Explanation

NBFCs are permitted to undertake derivative transactions primarily for hedging their own balance sheet risks, governed by the RBI's directions on derivatives. Proprietary trading or market-making requires specific authorisation and is not generally open to every NBFC. The framework emphasises risk containment and documented hedging rationale.

Question 32NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC-ICC raises funds by issuing non-convertible debentures to more than 200 investors through a private placement. Which regulatory concern arises first?

  1. The issue is automatically valid because debentures are debt, not equity
  2. The issue requires RBI approval for every subscriber
  3. The issue is exempt because the NBFC is regulated by the RBI
  4. The issue may be treated as a public issue under the Companies Act and require a prospectus Correct answer.

Explanation

A private placement made to more than 200 persons in a financial year is generally regarded as a public offer under the Companies Act, triggering prospectus and listing requirements. RBI regulation of the NBFC does not displace company law on capital raising. The mode of issue and the investor count therefore determine the compliance route.

Question 33NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC's net owned fund falls below the minimum prescribed for its layer. What is the most accurate description of the RBI's expected response?

  1. The RBI will immediately cancel the certificate of registration without any opportunity to rectify
  2. The RBI has no role until the next statutory audit
  3. The RBI may impose corrective action, restrict business and require the NBFC to submit a time-bound plan to restore compliance Correct answer.
  4. The RBI will automatically upgrade the NBFC to a higher layer

Explanation

A shortfall in net owned fund is a supervisory trigger, and the RBI may require a time-bound rectification plan along with business restrictions. Cancellation of registration is a last resort after due process, not an automatic first step. The response is graduated and proportionate to the shortfall and the entity's condition.

Question 34NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC appoints a chief executive officer. Which requirement under the RBI's fit and proper norms applies to this appointment?

  1. The board must satisfy itself of the candidate's integrity, competence and track record, with due diligence documented Correct answer.
  2. Only the academic qualifications of the candidate must be verified
  3. The appointment requires prior RBI approval in every case
  4. The appointment must be ratified by the RBI within seven days

Explanation

Fit and proper assessment for senior management is a board responsibility, requiring documented due diligence on integrity, reputation, competence and track record. Prior RBI approval is not required for every CEO appointment, though the RBI may examine the process during inspection. The assessment is substantive, not a formality of qualification checks.

Question 35NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC wants to outsource its loan recovery calling activity to a third-party agency. Which condition applies under the RBI's outsourcing directions?

  1. Outsourcing is prohibited for recovery activities
  2. The service provider must obtain a separate NBFC licence
  3. The NBFC remains fully responsible for the outsourced activity and must ensure the provider complies with applicable customer-protection norms Correct answer.
  4. The NBFC may transfer its regulatory liability to the service provider

Explanation

Outsourcing does not transfer the NBFC's regulatory obligations; the entity remains accountable to the RBI and to customers for the outsourced activity. Recovery practices by agents must conform to fair-practice and conduct norms, and the NBFC must monitor them. A service provider does not need an NBFC licence merely for recovery calls.

Question 36NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC proposes to set up a wholly owned subsidiary to conduct insurance distribution. What is the key regulatory consideration?

  1. The subsidiary may accept deposits as an insurance distributor
  2. No separate regulatory approval is needed for any insurance-related activity
  3. The subsidiary must be registered with the RBI as an NBFC in all cases
  4. The activity must comply with IRDAI norms for insurance intermediation, and the NBFC must assess group risk and capital impact Correct answer.

Explanation

Insurance distribution is regulated by IRDAI, and the NBFC must ensure the subsidiary complies with those norms while managing group-level risk and capital. The RBI also expects the NBFC to obtain its approval where the activity results in a new regulated entity or significant group exposure. Accepting deposits is not part of insurance distribution.

Question 37NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC's board is considering a proposal to lend to a company in which one of its independent directors is a whole-time director. What should the board do?

  1. Reject the loan automatically because such lending is prohibited
  2. Route the loan through a group entity to avoid disclosure
  3. Approve the loan as a routine transaction without disclosure
  4. Treat it as a related-party transaction, apply the arm's-length test and obtain the approvals required under company law and the RBI's norms Correct answer.

Explanation

Lending to an entity connected with a director is a related-party transaction requiring arm's-length pricing, disclosure and the approvals prescribed under the Companies Act and applicable RBI norms. It is not automatically prohibited, but it cannot be treated as routine. Routing the transaction through another entity to avoid disclosure would itself be a governance breach.

Question 38NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC-ICC has a customer grievance that remains unresolved after 30 days. What is the correct escalation route?

  1. The customer must approach SEBI
  2. The customer must file a civil suit as the only remedy
  3. The customer must wait for the annual general meeting
  4. The customer may approach the RBI's consumer education and protection department or the NBFC's ombudsman-linked mechanism as applicable Correct answer.

Explanation

Unresolved grievances can be escalated to the RBI's consumer protection framework, including the complaints portal and the relevant ombudsman mechanism where applicable. A civil suit is not the mandatory first or only remedy. SEBI has no jurisdiction over an NBFC's lending grievance.

Question 39NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC wants to pay interest on public deposits at a rate higher than the ceiling prescribed by the RBI. What is the correct position?

  1. The NBFC cannot exceed the ceiling, and any higher rate would breach the deposit directions Correct answer.
  2. The NBFC may pay a higher rate if it discloses it in the newspaper
  3. The NBFC may pay a higher rate if its board approves
  4. The NBFC may pay a higher rate only to institutional depositors

Explanation

The RBI prescribes a ceiling on the rate of interest that an NBFC may pay on public deposits, and exceeding it breaches the deposit directions regardless of board approval. The ceiling applies uniformly and cannot be circumvented by disclosure or by restricting the higher rate to a class of depositors. Compliance is a condition of holding the deposit-taking registration.

Question 40NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC holds a certificate of registration for deposit-taking but has not accepted fresh public deposits for three years. What is the regulatory implication?

  1. The NBFC must continue to comply with prudential and reporting norms, and the RBI may review whether the authorisation remains appropriate Correct answer.
  2. The certificate lapses automatically after one year
  3. The NBFC must immediately surrender its certificate
  4. The NBFC may retain the authorisation indefinitely without any reporting

Explanation

Holding a deposit-taking certificate carries continuing prudential, reporting and conduct obligations even if no fresh deposits are accepted. The RBI may review the appropriateness of the authorisation in light of the entity's business. Automatic lapse or mandatory immediate surrender is not the position.

Question 41NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC proposes to acquire 26 per cent of the paid-up equity of another NBFC. Which regulatory requirement applies?

  1. Only intimation to SEBI is required
  2. The acquisition is prohibited outright
  3. No approval is needed because the stake is below 50 per cent
  4. Prior written approval of the RBI is required for acquisition of control or substantial stake in an NBFC Correct answer.

Explanation

Acquisition of control or a substantial stake in an NBFC requires prior written approval of the RBI under the statutory framework governing acquisition of shares. The threshold is not simply 50 per cent; significant influence at lower levels also triggers the requirement. The transaction is not prohibited but must follow the approval process.

Question 42NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC's statutory auditor reports a fraud involving ₹2 crore in the course of the audit. What is the auditor's obligation?

  1. Report the matter to the RBI within the prescribed time, in addition to the board Correct answer.
  2. Report only at the next annual general meeting
  3. Report only to the board and take no further action
  4. Wait for the NBFC to complete its internal inquiry before reporting

Explanation

Statutory auditors of NBFCs must report frauds to the RBI within the prescribed timelines, alongside reporting to the board or audit committee. The obligation is independent of the entity's internal inquiry. Delaying until the annual general meeting would breach the reporting requirement.

Question 43NBFC Regulatory Framework (RBI Directions and Applicable Law)

Which of the following best describes the purpose of the RBI's prompt corrective action framework for NBFCs?

  1. To impose graduated restrictions on NBFCs breaching capital, asset-quality or leverage thresholds, with the aim of restoring financial health Correct answer.
  2. To fix interest rates charged to borrowers
  3. To reward NBFCs that grow their loan book rapidly
  4. To replace the certificate of registration with a temporary permit

Explanation

The prompt corrective action framework uses thresholds on capital, asset quality and leverage to trigger graduated supervisory restrictions. The objective is early intervention to restore the entity's financial health rather than immediate closure. It does not set lending rates or reward rapid growth.

Question 44NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC-ICC wants to co-lend with a bank under the RBI's co-lending arrangements. Which condition is central to the framework?

  1. The borrower must be a corporate only
  2. The bank must take the entire credit risk
  3. The NBFC must retain at least 20 per cent of each loan in its own book Correct answer.
  4. The co-lending arrangement must be approved by SEBI

Explanation

Under the co-lending framework, the NBFC is required to retain a minimum share, typically 20 per cent, of each loan in its own books. This ensures skin in the game and alignment of incentives between the bank and the NBFC. The arrangement does not transfer the entire credit risk to the bank, and SEBI is not the approving authority.

Question 45NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC's total assets are ₹400 crore and it is classified in the Base Layer. Which of the following is most consistent with the RBI's regulatory approach for this layer?

  1. Full application of the same prudential norms as Upper Layer NBFCs
  2. Exemption from all RBI reporting
  3. Exemption from the requirement to maintain net owned fund
  4. A lighter-touch framework with simplified norms, while core requirements such as registration and fair practices still apply Correct answer.

Explanation

Base Layer NBFCs are subject to a lighter-touch regulatory framework with simplified prudential norms appropriate to their size and complexity. Core obligations such as registration, net owned fund, fair practices and reporting continue to apply. Exemption from net owned fund or reporting is not part of the framework.

Question 46NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC receives a request from a law enforcement agency for customer account information. What is the appropriate course of action?

  1. Refuse all requests from law enforcement
  2. Verify the authenticity of the request and follow the prescribed legal process, including confidentiality obligations Correct answer.
  3. Disclose the information immediately without any verification
  4. Publish the request details on the company website

Explanation

Customer information is confidential, and disclosure should occur only after verifying the authenticity of the request and following the prescribed legal process. The RBI's customer-protection norms permit disclosure where required by law or by a lawful authority. Blanket refusal or public disclosure would both be inappropriate.

Question 47NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC has a large concentration of borrowings from a single bank that is due for renewal within 90 days. Which ALM action is most appropriate?

  1. Ignore the maturity because the bank has historically renewed the facility
  2. Treat it as a refinancing risk, arrange alternative lines and stress-test the liquidity gap Correct answer.
  3. Increase short-term lending to improve yields
  4. Reduce disclosure of the concentration in the ALM statement

Explanation

A large single-bank borrowing maturing within 90 days constitutes refinancing and concentration risk that should be addressed through contingency funding lines and stress testing. Historical renewal behaviour is not a substitute for planning. Reducing disclosure would breach ALM reporting requirements.

Question 48NBFC Regulatory Framework (RBI Directions and Applicable Law)

Which statement correctly describes the RBI's powers in relation to an NBFC's statutory auditors?

  1. The RBI can only recommend auditors to the board
  2. The RBI may appoint auditors, issue directions on the audit and require the NBFC to replace auditors in specified circumstances Correct answer.
  3. The RBI has no role once the shareholders appoint the auditor
  4. The RBI must obtain the auditor's consent before inspecting the NBFC

Explanation

The RBI has statutory powers over the audit function, including appointing auditors in specified circumstances, issuing directions and requiring a change of auditor. Shareholder appointment does not exclude RBI oversight. The RBI's inspection powers do not depend on auditor consent.

Question 49NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC wants to offer a credit facility through a co-branded payment card with a bank. Which regulatory issue is most relevant?

  1. Whether the card can be used to accept deposits
  2. Whether the NBFC can issue currency notes
  3. Whether the bank must transfer its banking licence to the NBFC
  4. Whether the arrangement complies with the RBI's co-branding norms, including customer ownership and disclosure of the NBFC's role Correct answer.

Explanation

Co-branded card arrangements are governed by the RBI's co-branding norms, which address customer ownership, disclosure of the roles of the parties and the limits on the NBFC's participation. An NBFC cannot issue currency notes or accept deposits through a card. A banking licence is not transferred in such arrangements.

Question 50NBFC Regulatory Framework (RBI Directions and Applicable Law)

An NBFC's board approves a dividend although the entity has not complied with the minimum capital adequacy requirement. What is the regulatory position?

  1. The dividend is valid if paid in shares rather than cash
  2. The dividend is valid because the board approved it
  3. The dividend is valid if the shareholders waive the requirement
  4. The dividend declaration breaches the RBI's dividend norms and should be reversed or not paid Correct answer.

Explanation

The RBI's dividend norms condition dividend declaration on compliance with capital adequacy and other prudential requirements. A declaration made despite non-compliance breaches those norms and should not be given effect. Board approval or shareholder waiver cannot cure the breach.