Read the given passage and answer the following question based on it:

The non-banking financial companies (NBFCs) are significant components of India’s financial system. These private sector institutions have existed since the 1940s but were formally recognized by the Reserve Bank of India (RBI) only in 1964. Over the years, this sector has grown substantially, with assets amounting to nearly 13% of India’s gross domestic product (GDP). NBFCs are often considered shadow banking entities as their operations largely fall outside the traditional banking system. In an emerging market economy like India, a large part of the population remains outside the formal financial network. NBFCs serve as both substitutes and complements to the banking system, offering various banking services without holding a banking license. They focus on niche areas such as automobile financing, gold loans, and agricultural credit. The success of NBFCs is attributed to their diversified product range, low costs, wider reach, lower bad debts, and better risk management. They fill the gaps left by the banking sector in providing financial services. NBFCs are known for quick decision-making, flexibility tailored to customer needs, and willingness to take greater risks, being free from the rigid structures of banks. However, their overall vulnerability remains a concern. For example, the bankruptcy of Infrastructure Leasing & Financial Services (IL&FS) caused a crisis affecting funding channels for other NBFCs and created apprehension among banks, which are major funders of NBFCs, making them reluctant to lend further. Such a crisis in the NBFC market could have significant repercussions on formal banking. Unfortunately, NBFCs do not receive direct support from the central bank during crises. Despite extensive literature on Indian banking, research on NBFCs remains surprisingly limited.

**Question:**

Which of the following statements is **false** according to the passage?

Question

Read the given passage and answer the following question based on it:

The non-banking financial companies (NBFCs) are significant components of India’s financial system. These private sector institutions have existed since the 1940s but were formally recognized by the Reserve Bank of India (RBI) only in 1964. Over the years, this sector has grown substantially, with assets amounting to nearly 13% of India’s gross domestic product (GDP). NBFCs are often considered shadow banking entities as their operations largely fall outside the traditional banking system. In an emerging market economy like India, a large part of the population remains outside the formal financial network. NBFCs serve as both substitutes and complements to the banking system, offering various banking services without holding a banking license. They focus on niche areas such as automobile financing, gold loans, and agricultural credit. The success of NBFCs is attributed to their diversified product range, low costs, wider reach, lower bad debts, and better risk management. They fill the gaps left by the banking sector in providing financial services. NBFCs are known for quick decision-making, flexibility tailored to customer needs, and willingness to take greater risks, being free from the rigid structures of banks. However, their overall vulnerability remains a concern. For example, the bankruptcy of Infrastructure Leasing & Financial Services (IL&FS) caused a crisis affecting funding channels for other NBFCs and created apprehension among banks, which are major funders of NBFCs, making them reluctant to lend further. Such a crisis in the NBFC market could have significant repercussions on formal banking. Unfortunately, NBFCs do not receive direct support from the central bank during crises. Despite extensive literature on Indian banking, research on NBFCs remains surprisingly limited.

**Question:**

Which of the following statements is **false** according to the passage?

Accepted Answer

**Solution:**

1. The passage states that NBFCs were formally recognized by the RBI in 1964, not 1965. Therefore, option (a) is incorrect.

2. The passage mentions that NBFCs' assets amount to nearly 13% of India's GDP, confirming option (b) as true.

3. It is explained that NBFCs' activities can pose risks to formal banking, especially highlighted by the IL&FS crisis, so option (c) is true.

4. The passage credits NBFCs' success to low costs, wider reach, and better risk management, making option (d) true.

Hence, the false statement is option (a).

**Answer:** (a) NBFCs came under the purview of RBI in the year 1965.

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