Nidhi(Mutual Benefit Society)
Nidhi in the Indian context / language means “treasure”. However, in the Indian financial sector it refers to any mutual benefit society notified by the Central / Union Government as a Nidhi Company. They are created mainly for cultivating the habit of thrift and savings amongst its members.
The companies doing Nidhi business, viz. borrowing from members and lending to members only, are known under different names such as Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company.
Nidhis are more popular in South India and are highly localized single office institutions.They are mutual benefit societies, because their dealings are restricted only to the members; and membership is limited to individuals. The principal source of funds is the contribution from the members. The loans are given to the members at relatively reasonable rates for purposes such as house construction or repairs and are generally secured. The deposits mobilized by Nidhis are not much when compared to the organized banking sector.
Nidhi’s are companies registered under section 620A of the Companies Act, 1956(Section 406 of the new Companies Bill 2012, as passed by Lok Sabha) and is regulated by Ministry of Corporate Affairs (MCA).Even though Nidhis are regulated by the provisions of the Companies Act, 1956, they are exempted from certain provisions of the Act, as applicable to other companies, due to limiting their operations within members.
Nidhis are also included in the definition of Non- Banking Financial companies or (NBFCs) which operate mainly in the unorganized money market. However, since 1997, NBFCs have been brought increasingly under the regulatory ambit of the Indian Central Bank, RBI. Non-banking financial entities partially or wholly regulated by the RBI include:
- NBFCs comprising equipment leasing (EL), hire purchase finance (HP), loan (LC), investment (1C) (including primary dealers (PDs)) and residuary non-banking (RNBC) companies;
- mutual benefit financial company (MBFC), i.e. nidhi company;
- mutual benefit company (MBC), i.e. potential nidhi company; i.e., A company which is working on the lines of a Nidhi company but has not yet been so declared by the Central Government; has minimum net owned fund(NOF) of Rs.10 lakh, has applied to the RBI for certificate of registration and also to Department of Company Affairs (DCA) for being notified as Nidhi company and has not contravened directions/ regulations of RBI/DCA.
- miscellaneous non-banking company (MNBC), i.e. chit fund company.
Since Nidhis come under one class of NBFCs, RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities. However, in recognition of the fact that these Nidhis deal with their shareholder-members only,RBI has exempted the notified Nidhis from the core provisions of the RBI Act and other directions applicable to NBFCs. As on date (February 2013) RBI does not have any specified regulatory framework for Nidhis.
The Central Government vide Notification No.5/7/2000-CL.V dated 23rd March 2000 constituted a Committee to examine the various aspects of the functioning of Nidhi Companies.There was no Government Notification defining the word ‘Nidhi’. Taking into consideration the manner of functioning of Nidhis and the recommendations of the Shri P.Sabanayagam Committee in its report and also to prevent unscrupulous persons using the word ‘Nidhi’ in their name without being incorporated by Department of Company Affairs (DCA) and yet doing Nidhi business, the Committee suggested the following definition for Nidhis:
“Nidhi is a company formed with the exclusive object of cultivating the habit of thrift, savings and functioning for the mutual benefit of members by receiving deposits only from individuals enrolled as members and by lending only to individuals, also enrolled as members, and which functions as per Notification and Guidelines prescribed by the DCA. The word Nidhi shall not form part of the name of any company, firm or individual engaged in borrowing and lending money without incorporation by DCA and such contravention will attract penal action.”
A part of this definition is appearing in the new Companies Bill 2012 at Section 406.
The list of registered NBFCs may be seen at http://www.rbi.org.in/scripts/bs_nbfclist.aspx
The quantum of deposits mobilized by these entities may be seen at http://dbie.rbi.org.in/DBIE/dbie.rbi?site=statistics (under the tab “financial sector”)
For more details on Nidhi Companies see website of MCA: http://www.mca.gov.in/Ministry/nidhi.html