If you are looking to start a finance business legally without NBFCs or without RBI Approval and you are thinking about NIDHI Company so you are at right place, because Nidhi Company is a good business in finance sector which has all such features of lending loans and accepting deposits & opening of saving accounts. Let’s Start the Introduction of NIDHI Company--
In simple Terms, Nidhi is a Hindi word which means “finance or fund”. In the India Financial sector Nidhi refers to any mutual benefit so0ciety notified by the Central/Union Government as a Nidhi Company.
After Registration of Nidhi Company, Company can borrow from members and lending to its members.
Nidhi Company are formed only for the benefit of its members only, on outsiders i.e. who is not the member of the Nidhi Company are not allowed to deposit any money or doing any kind of business with the concerned Nidhi Company.
Nidhi Company is governed by the Companies Act, 2013 under section 406 and Nidhi Rules, 2014.
Nidhi Company as per Section 406 of Companies Act, 2013
Nidhi Means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, recurring deposits from, and lending to, its members only, for their mutual benefit, and which complies which such rules as are prescribed by the Central Government for regulation of such class of Companies.
Every Company which had been declared as a Nidhi Company or Mutual Benefit Society under sub-section (1) of section 620A of the Companies Act, 1956.
Incorporation/ Registration of Nidhi Company
A Nidhi Company to be incorporated under the Act shall be a public company and shall have a minimum paid up equity capital of five lakh rupees.
On and after commencement of the Act, no Nidhi company shall issue preference shares.
Nidhi Company shall have its object of cultivating the habit of thrift5 and savings amongst its members, recurring deposits from, and lending to, its members only, for their mutual benefits under its Memorandum of Association.
Ever Company incorporated as a Nidhi shall have the last words “Nidhi Limited” as part of its name.
Members details and other legal formalities
As per Nidhi rules, 2014 Every Nidhi Company shall, with in a period of one year from the commencement of these rules ensure that it has :-
(a) It has completed at least 200 members. (which means 200 members are mandatory in a year from borrowing or lending) a natural person, (not minor) shall be member of company)
(b) Net owned funds of ten lakh rupees or more (Net owned funds includes paid up Capital plus profits and Reserves earned during the year Long term Liabilities-Fictitious Assets i.e. Preliminary exp.)
(c) Unencumbered term deposits of not less than 10% of its outstanding deposits as specified under rule 14. And
(d) Ratio of Net Owned Funds (NOF) to deposits of not more than 1:20
Opening of Branches
As per Rule 10 of Nidhi Rules, 2014, A Nidhi may open up to three branches only if it has earned net profits after tax continuously during the preceding three financial years.
If a Nidhi proposes to open more than three branches within or outside the district, it shall obtain the prior permission f the Regional Director (RD) and an intimation is to be given to the Registrar about opening of every branch within 30 days of such opening.
No Nidhi shall open branches or collection centers or offices or deposit centers or by whatever name called outside the state where it registered office is situated.
Not Nidhi shall open branches or collection centers or offices or deposit centers or by whatever name called unless financial statement and annual return (up to date) are filled with the Registrar.
Closing of Branches
A Nidhi shall not close any branch unless it-
(a) Publishes an advertisement in a newspaper in vernacular language in the place where it carries on business at least thirty days prior to such closure, informing the public about such closure;
(B) Fixes a copy of such advertisement or a notice informing such closure of the branch on the notice board of Nidhi for a period of at least thirty days from the date on which advertisement was published under clause (a); and
(c) Gives an intimation to the Registrar within thirty days of such closure.
Deposits (Rule13) A Nidhi Company can take deposits in the form of R.D., F.D., D.D. and also can open a saving account of its Members.
Maximum Deposits Limit:
A Nidhi shall not accept deposits exceeding 20 times of its NET owned Funds (NOF) as per the last audited financial statements. (let us understand this by the table below as an example)
Duration of Deposits:
Fixed deposits shall be accepted for a minimum period of 6 months and a maximum period of 60 months. (Nidhi Company can accept deposits like Banks/NBFCs of which maximum period of deposit is 5 years, however a company can renew the same for next 5 year on the choice of the depositor)
Recurring Deposits shall be accepted for a minimum period of 12 months and a maximum period of 60 months.
(Recurring deposit is a very good tool which is mostly uses by the Nidhi Companies to increase the deposit amount and funds and hence same the fixed deposits its maturity time is 5 years (60 month)
Practically, when the recurring deposit is closed or mature, the money of such deposits automatically transferred to the regular saving accounts. Nidhi Company can again offer the recurring account facility to the same member and amount accumulated of recurring deposits can be invested in fixed deposit as bulk money on the choice of the customer. Consequently, it is a sales promotion idea for the company.
In case of recurring deposits relating to mortgage loans the maximum period of recurring deposits shall correspond to the repayment period of such loans granted by Nidhi. ( let us understand with example, suppose xyz Nidhi Limited lends a mortgage loan to Member “A” for a repayment period of 7 years. Member “A” also opens a recurring account with Nidhi Company for 7 years. Can he do it?
yes, because in case of mortgage loans, the maximum period of recurring deposit can be equal to repayment period of such loans. However, it is important to note that this limit is applicable to mortgage loans only and for other loans point no. 2 shall be applicable)
Rate of Interest on Fixed Deposit and Recurring Deposit
Rate of Interest which can be offered on Fixed and Recurring Deposit shall not exceed the maximum rate of interest prescribed by RBI which the NBFC offer on theirs. (The Maximum interest rate offered on Fixed Deposit and recurring deposit will always be floating and it is always important to look at the RBI policies towards the interest rate.)
Whatever RBI decides for NBFC about the rate of interest, the same will be applied directly to the Nidhi companies. (at present 12.5%)
Please stay in touch to know more about rate of Interests. It changes any time.
Limit of amount of saving Accounts and its Interest
Maximum Balance which can be kept in savings deposit account shall not exceed 1 lac Rs. (However, if any saving account with zero interest will not be subject to above 1 lac limit)
Loan against Securities
A Nidhi company Cannot lend any Unsecured Loan (Loan without security), Therefore, it has to give loan against securities mentioned in the law.
A Nidhi company can give loan against the following securities –
Gold, Silver and Jewellery – Loan against Gold, Silver, Jewellery is also known as Gold Loan. The Repayment period of such loan shall not exceed one year. The Total value (principle plus Interest) of loan should not exceed the 80% of the total value of gold or silver.
Loan against Property (Immovable Property)- Loan against property is also a part of loan given by Nidhi Company. The Repayment period shall not exceed 50% of the total value of property.
FD Receipts, National Saving Certificates, Government Securities and Insurance Policies – Such type of securities uses rarely. The Repayment period of such loan against Fixed Deposit shall not exceed the unexpired period of the fixed deposits.
Loans which are not allowed by Nidhi Company
1. Personal Loan
2. Micro Finance-small credit
3. vehicle Finance
4. hire purchase
Personal Loan- A Nidhi Company is not allowed to lend money as personal loan on the basis of credibility or income tax return. The Loan has to be against any security.
Micro Finance- small Credit – Micro finance business is very famous especially in rural and semi urban areas. However, no company is allowed to do the business of micro finance, other than registered NBFCs.
Vehicle Finance—The business of vehicle finance is also not allowed. The business of vehicle finance is also allowed only to registered NBFC. These are all special categories and need a net worth of at least Rs. 2 crore.
Hire Purchase – The business of hire purchase has also been restricted to Nidhi companies.
Rate of Interest on Loan
The rate of interest to be charged on any loan given by a Nidhi shall not exceed 7.5% above the highest rate of interest offered on deposits by Nidhi and shall be calculated on reducing balance method.
(for example, if Nidhi company has decided to offer the rate of interest on deposits 12.5% than the maximum loan rate of interest shall be 20% (12.5+7.5).