Directions: Read the passage carefully and answer the question that follows.
Non-banking financial companies, commonly called NBFCs, have become a significant part of India’s financial landscape. Although many such private institutions existed for decades, the Reserve Bank of India formally brought them within its regulatory framework in the 1960s. Their combined assets have expanded steadily and now represent a notable share of the country’s economic output.
NBFCs provide several credit-related services without holding a conventional banking licence. They often serve customers and sectors that may receive limited attention from banks, including vehicle purchasers, small agricultural borrowers, and people seeking loans against jewellery. Their specialised products, broad local presence, relatively quick approvals, and flexible lending practices allow them to supplement the formal banking network while also competing with it in selected areas.
For these reasons, NBFCs are frequently described as part of the shadow-banking system: they perform financial intermediation outside the routine structure through which commercial banks operate. This arrangement can improve access to finance, but it can also create risk. A major default by a large finance firm may disrupt the flow of funds to other NBFCs, making banks reluctant to lend and placing pressure on the wider financial system. Unlike scheduled banks, these firms may not receive direct central-bank assistance during a liquidity crisis. Consequently, research on this segment remains comparatively limited.
Which event is described in the passage as India’s “mini-Lehman moment”?
Correct Answer :
A major finance firm’s default interrupted funding for other NBFCs and made banks hesitant to extend further credit.
Solution :
Correct Answer: A major finance firm’s default interrupted funding for other NBFCs and made banks hesitant to extend further credit.
Step-by-Step Explanation:
1. Understanding the Context:
A "Lehman moment" or "mini-Lehman moment" in financial contexts refers to a severe liquidity crisis triggered by the unexpected collapse or default of a prominent financial firm, which leads to widespread panic, credit freeze, and contagion across the market.
2. Passage Analysis:
The passage details the mechanism of risk within India's shadow-banking (NBFC) sector in the third paragraph:
"A major default by a large finance firm may disrupt the flow of funds to other NBFCs, making banks reluctant to lend and placing pressure on the wider financial system."
3. Evaluating the Option:
- The event described involves a major finance firm defaulting, which subsequently halts funding to peer NBFCs and creates reluctance among commercial banks to extend further credit.
- This chain of events captures the systemic liquidity shock characterized as India's "mini-Lehman moment."
Hence, the statement accurately describing this event is: A major finance firm’s default interrupted funding for other NBFCs and made banks hesitant to extend further credit.
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