Nidhi Companies and Non-Banking Financial Companies (NBFCs) are two distinct financial entities operating in India. While both fall under the umbrella of the Non-Banking Financial Sector, there are fundamental differences between Nidhi Companies and NBFCs in India based on functions, membership criteria, advertisement regulations, service charges, and branch operations. Understanding these differences is important for individuals seeking financial services or considering investment options. In this blog, we will see the differences between Nidhi Companies and NBFCs in India.
Meaning of Nidhi Companies
Before going into the differences between Nidhi Companies and NBFCs in India , let us first understand the concept of Nidhi Companies. Nidhi falls within the Indian Finance Sector and operates as a mutually beneficial company, incorporated to promote the practice of saving money and utilising it wisely among its members. Nidhi Company is registered as a Public Limited Company under The Company Act 2013 and is governed by Nidhi Rules 2014. The structure of the company ensures that only its members can make contributions and avail of loans.
This is the primary objective for individuals opting to become members of such a company. Members of this society save and contribute funds, which are then utilised to provide loans to other members at reasonable rates.
These loans are typically used for purposes such as house construction/repair and weddings. The key goals of Nidhi Company include fostering a savings habit among its members and facilitating the receipt and lending of deposits for mutual benefit. The company exclusively engages with its members.
Requirements and restrictions for Nidhi Companies
The requirements and restrictions for Nidhi companies are:
- It must be a public company as per the Companies Act 2013.
- The minimum equity share capital required is Rs 5,00,000.
- Preference shares cannot be issued. If preference shares were already issued before the commencement of this act, they must be redeemed according to the terms of their issue.
- The primary objective is to promote a savings habit among members and facilitate the receipt and lending of deposits for mutual benefit.
- The company name must include “Nidhi Limited.”
- Within one year from the commencement of these rules, every Nidhi Company must have a membership of 200 individuals.
- The net owned funds of the company must be Rs. 10,00,000 or more.
- Opening a current account with members is not permitted.
- Deposits or loans cannot be accepted from any person other than members.
- The company cannot engage in any business activities other than borrowing or lending.
- Assets pledged by members as security cannot be utilised.
- Advertisements for deposits cannot be issued.
- Partnership agreements for borrowing or lending activities are not allowed.
- Brokerage cannot be paid for granting loans to members.
Non-Banking Financial Company
An NBFC is a company involved in activities such as providing loans and advances, acquiring shares/stocks/bonds/debentures/securities issued by the government or local authorities, leasing, hire-purchase, insurance, and chit business. Types of NBFC registration include equipment leasing companies, hire-purchase companies, loan companies, and investment companies.
However, it does not include institutions primarily engaged in agriculture, industrial activities, goods trading, services, or the sale/purchase/construction of immovable property. NBFCs are non-banking institutions that receive deposits under various schemes or arrangements, either in a lump sum or in instalments and are an important segment of the Indian Financial System. They are regulated by the Reserve Bank of India and have the main objective of receiving deposits.
Requirements and Restrictions for NBFCs in India
The requirements and restrictions for NBFCs are:
- The NBFC must register itself with the RBI.
- For NBFC incorporation, a minimum net owned fund of Rs. 200 lakhs is required.
- The application for registration must be submitted in the prescribed format along with the necessary documents to the RBI.
- Upon approval, the RBI will issue a certificate of registration.
- NBFCs can accept deposits from the public only if they hold a valid certificate of registration.
- Public deposits can be accepted for a minimum period of 12 months and a maximum period of 60 months.
- The repayment of deposits is not guaranteed by the RBI.
- NBFCs must possess an investment-grade credit rating.
- They are prohibited from offering additional benefits or gifts to depositors.
- Deposits repayable on demand cannot be accepted.
What are the Differences Between Nidhi Companies and NBFCs?
The basic set of differences between Nidhi Companies and NBFCs in India are:
Meaning
In India, all business companies are classified as either Non-Banking Financial Companies (NBFCs) or Banking Companies. Nidhi Company falls under the category of NBFCs as it is incorporated. However, it differs from traditional NBFCs because it cannot accept deposits from or lend to the general public. This marks one of the major differences between Nidhi Companies and NBFCs.
Functions
Another one of the differences between Nidhi Companies and NBFCs is that Nidhi Companies are restricted from engaging in activities such as chit-fund operations, hire purchase finance, leasing finance, insurance, or acquiring securities issued by corporate entities. On the other hand, NBFCs are financial institutions that conduct activities such as providing loans and advances, acquiring stocks/shares issued by the government or local authorities, leasing, hire-purchase, and insurance business.
Membership
Nidhi Companies are prohibited from including corporate bodies as their members, which means they cannot accept deposits from such institutions. They can only lend or accept deposits from their existing members or shareholders. Therefore, becoming a member of a Nidhi Company is a prerequisite for engaging in any transactions with them. In contrast, NBFCs can accept public deposits for a minimum period of 12 months and a maximum period of 60 months. This marks another one of major differences between Nidhi Companies and NBFCs.
Advertisement
Further, Nidhi Companies are not permitted to advertise their services for accepting deposits. On the other hand, NBFCs are allowed to advertise their services for accepting or granting loans, deposits, and other financial activities.
Service Charges
Nidhi Companies are not allowed to charge their members any service fees for acquiring membership or issuing shares. However, they can charge processing fees on loans. The interest rates charged by NBFCs must not exceed the ceiling prescribed by the Reserve Bank of India.
Branches
A Nidhi Company cannot open branch offices until it achieves three consecutive years of profitability. In contrast, NBFCs do not have any such restrictions and can open branches without complications.
Final Thoughts
Therefore, the differences between Nidhi Companies and NBFCs are manifold and must be clearly understood. Nidhi Companies focus on providing financial services exclusively to their members or shareholders, emphasising a close-knit community approach. On the other hand, NBFCs have a broader scope, offering a wide range of financial services to the general public. Since a Nidhi company does not have the right to do any business other than the Nidhi scheme, it often faces some or other restrictions. At such instances, NBFCs are the rescue.
