Nidhi companies

Nidhi companies

Subject – Economy

Context – The Ministry of Corporate Affairs has warned people against parking savings in Nidhi companies, after it found that none of the firms that had applied so far to be recognised under relevant rules was compliant with the norms.

Concept –

• Under Nidhi Rules, 2014, Nidhi is a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and saving amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit.
• It is a company registered under the Companies Act, 2013.
• It works on the principle of mutual benefits that are regulated by the Ministry of Corporate Affairs.
• Nidhi Company is a class of Non-Banking Financial Company(NBFC) and Reserve Bank of India(RBI) has powers to issue directives for them related to their deposit acceptance activities.
• However, since these Nidhis deal with their shareholder-members only, RBI has exempted them from the core provisions of the RBI Act and other directions applicable to NBFCs.
• 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.
• 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.