Nidhi company vs NBFC vs. MF: what is the best business structure for you to start?

October 9, 2019

Nidhi Company Explained

In order to choose the best business structure before you open a Finance Company, Nidhi company vs NBFC, MF etc, let us first understand what is Nidhi Company, that exists only in the Indian community. The term Nidhi means ‘treasure’. And in the Indian Finance sector, it has come to represent a mutually beneficial company, incorporated to infuse the habit of saving money or using it carefully, among its members. Nidhi Company is registered as a Public Limited Company under The Company Act 2013 and is governed by Nidhi Rules 2014. Under this structure, only the members can contribute towards the and only members can take a loan out of it. Members opting for a Nidhi Company Registration, have this aim as their sole objective.

The members of such society save and contribute to the funds of the company. This fund is then used to lend, at reasonable rates, to other members. The loans are usually taken for construction/repair of a house, or weddings in the family, etc.

Nidhi Company vs NBFC

All Monetary Business Companies in India are classified as Non-Banking Financial Companies (NBFC) or Banking Companies. Because Nidhi Company is incorporated, keeping in mind improvement in the culture of saving and lending money, they come under the ambit of NBFC.

  • On the other hand, as they cannot accept Deposit from the public, nor lend to the public, so they are not purely NBFCs, and out of the scope of RBI. Though, RBI issues guidelines and directives for them.
  • NBFC stands for all those financial institutions that engage in the business of loans/advances, acquisition of shares/stocks/other securities issued by Government or local authority, leasing, hire-purchase, insurance business, chit business.
  • Nidhi company vs NBFC, the first one is incorporated only to lend or take deposits. And that too, from members/shareholders only. It cannot carry any business related to chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities issued by any body corporate. These businesses are covered by the second one, i.e. NBFCs.
  • Nidhi Company comes under the ambit of the Companies Act, 2013 & 2014, whereas NBFC is covered by Companies Act, 1956.

Nidhi Company vs Chit Fund

A chit fund is one of the forms of savings exercised in India.

Just like Nidhi Company, a Chit Fund is also an arrangement where a group of people agrees to contribute money, into a fund. Only members/shareholders make deposits or take loans, in each of these forms of NBFC.

However, that is where the similarity ends.

  • In India, Chit Funds are registered under the NBFC & Chit Funds Act, 1982 and need extra licenses to operate. Whereas Nidhi Company Formation comes under the ambit of the Companies Act, directives from RBI to its governance are issued.
  • Chit Sund is organized by a company, that only oversees its transactions and charge some interest/profit, for which, it may, also, appoint a supervisor or agent. This company or the agent need not be a member subscriber of the running Chit Fund Scheme. In Nidhi Company, on the contrary, all functions are seen to, by its members. No-one from outside the shareholders is paid any sort of remuneration.
  • In a chit fund, a group of people decides to contribute a particular amount of money, as fixed installments, at pre-defined periodic intervals, into the fund. Whereas, in the Nidhi Company, members can make a lump-sum or a recurring deposit.
  • The Chit Fund members, any, can then draw a lump-sum, by fixing a payout date, or lucky draw, auctions etc. While Nidhi Company shareholders can take a loan (to be returned, with an interest charged).
  • The withdrawal in the Chit Fund can only be made during the collection process. As soon as the duration of the pre-agreed Chit Fund Scheme is over, the fund is disposed of, between the members, after paying off the agent or organizer.  On the contrary, in a Nidhi Company, only the Saving deposits or the loans are for a fixed duration, not the company.
  • The number of installments and, thus, the duration equals the number of members in a chit fund so that everyone gets a turn.
  • Chances of fraud in a Chit Fund are high. There have been many instances of the promoter running away with the corpus amount

Chit finance schemes might also be unorganized schemes conducted among companions and relatives. There are some varieties of chits that are organized only to accomplish a particular reason. Chit support has played an important role in the financial development of people of a few states, for example, Kerala. providing easier credit.  In Kerala, there exists a company, run under the state govt., called Kerala State Financial Enterprise, with Chit Funds scheme as its primary business activity.

And who can forget the infamous Saradha Scam of West Bengal, where the scheme was abused by its foremen.

Nidhi company vs Mutual Funds (MF)

The only similarity between a Nidhi Company and a Mutual Funds Company is that neither can work without people investing in them. Still, a lot many people confuse over them, given the fact that the Nidhi Company can also be termed as a Mutually Benefit Society. Here are a few differences so you have a clear idea for your investment.

  • Nidhi Company is for the members and by the members only. MF would mean the general public can invest.
  • People go for  Nidhi Company Incorporation, to develop a habit of saving, self-reliance, and parsimony, amongst the members. On the contrary, people invest in MF to earn, on their investments.
  • Lending or borrowing is done from the Pool to its members only, in a Nidhi Company. The MF invests, on behalf of the shareholders, in a wide range of Equity/Bonds/debentures/govt securities etc, to get the maximum return.
  • In Nidhi Company, the interest rates charged/paid are minimal. The basic objective of MF is to earn the highest rate on the investments, as per the conditions applied.
  • The Act covering MF is SEBI Act, 1996.

Nidhi Company vs Micro Finance Institutions (MFI)

The purpose of MFIs, also, is to promote economic activity among low-income earners. Especially those, who rarely get access to the official banking services.

Their services are provided to those trapped in poverty, the unemployed or low-income individuals having low financial resources. Considering that they may attempt to save, borrow, take a loan, or even insurance. To also help cases where the very poor fall in the hands of loan sharks who charge an exorbitant interest rate. And then the borrower is never able to get out of the vicious circle.

People can take small and reasonable business loans safely, from an MFI. The lending practices followed are ethical and follow the laws.

Though both are registered under the Companies Act 2013, they both are also regulated by RBI.

However, there are differences in the working between a Nidhi Company and MFI, some of which are explained below:

  • An MFI cannot exist without the backing of microfinance institutions.
  • MFIs support many services to local individuals and groups, that are related to finance, but not exclusively lending and borrowing. MFI can help people open a saving bank account. It can also conduct educational programs that teach the principles of saving, conscious spending, cash management, even accounting or book-keeping. Whereas the sole purpose of Nidhi Company Registration is to inculcate the habit of saving and thrift.
  • The number of members or shareholders for Nidhi Company, at its inception, need to be minimum 7 (and have appointed at least 200 members by the end of its first year), while the clients for an MFI depends on its reach, some are serving over millions of people.
  • Minimum initial net owned fund (NOF) requirement for Nidhi Company is Rs 5 lakh and to raise another Rs 5 lakh by the end of its first year, (in 2 years it needs to have a net owned fund of 2 crores). On the contrary, MFI need minimum NOF (net owned fund) of 5 crores (2 crores for North-easter states).

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