Consider the following statements regarding the non-banking financial companies (NBFCs): 1. These are financial institutions that provide loans but do not have full banking licenses. 2. If NBFCs struggle, it can create problems for banks and financial markets. 3. NBFCs fund their loans mainly through bank borrowings. Which of the statements given above are correct? |ForumIAS

Q. Consider the following statements regarding the non-banking financial companies (NBFCs):
1.These are financial institutions that provide loans but do not have full banking licenses.
2.If NBFCs struggle, it can create problems for banks and financial markets.
3.NBFCs fund their loans mainly through bank borrowings.
Which of the statements given above are correct?

[A] 1 and 2 only

[B] 2 and 3 only

[C] 1 and 3 only

[D] 1, 2 and 3

Answer: A

Notes:

Explanations –

Statements 1 and 2 are correct. NBFCs are financial institutions that provide banking services without meeting the legal definition of a bank. They are regulated by the Reserve Bank of India (RBI) but do not hold a banking license. NBFCs are interconnected with banks and financial markets, so if they face financial stress, it can spread to the banking sector, impacting liquidity and credit availability.

Statement 3 is incorrect. While bank borrowings remain a significant source of funds for NBFCs, they are not the main source. According to the IMF report, 56% of NBFC lending is financed through market instruments.

Source: The Hindu

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