Question

    Which of the following is a restriction regarding

    investments made by banks in securities/instruments issued by NBFCs?
    A Banks should not invest in Zero Coupon Bonds (ZCBs) issued by NBFCs. Correct Answer Incorrect Answer
    B Banks are permitted to invest in Non-Convertible Debentures (NCDs) with an original or initial maturity of up to one year. Correct Answer Incorrect Answer
    C Banks should ensure that the issuer discloses the purpose for which the NCDs are being issued. Correct Answer Incorrect Answer
    D Banks can freely invest in all securities/instruments issued by NBFCs. Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Banks should not invest in Zero Coupon Bonds (ZCBs) issued by NBFCs unless the issuer NBFC builds up sinking fund for all accrued interest and keeps it invested in liquid investments / securities (Government bonds). Banks are permitted to also invest in Non-Convertible Debentures (NCDs) with original or initial maturity up to one year issued by NBFCs. However, while investing in such instruments banks should be guided by the extant prudential guidelines in force, ensure that the issuer has disclosed the purpose for which the NCDs are being issued in the disclosure document and such purposes are eligible for bank finance.

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