A Nidhi Company is incorporated to encourage its members to practice thrift and save money, as well as to accept deposits from them and lend money to them only for their mutual advantage. Nidhi conducts its business exclusively with its members. Only individuals can be admitted as members of Nidhi; bodies corporate, trusts, or firms are not allowed to become members. It primarily operates in the unorganized money market. Nidhi plays an important role in extending loans to rural people with minimal formalities.
The MCA (Ministry of Corporate Affairs) is the regulator of Nidhi companies. Nidhis fall under the category of NBFCs (Non-Banking Financial Companies). The RBI (Reserve Bank of India) has the authority to regulate Nidhis in terms of their acceptance of deposits. However, as Nidhis conduct their business exclusively with their members, the RBI has exempted notified Nidhis from the core provisions of the RBI Act and other directives applicable to NBFCs.
We will explore the norms for lending, accepting deposits, net owned funds, minimum investment in an unsecured term deposit, and the prescribed rate of interest to be charged on loans and offered on deposits as outlined in the Nidhi Rules of 2014.
A Nidhi company is required to be a public company and must be incorporated with a minimum of seven members, out of which three members will become its directors. However, within one year from the date of incorporation, the Nidhi company must ensure that it has a minimum of two hundred members.
Each Nidhi company must be incorporated with a minimum paid-up equity capital of ₹10 lakhs. Furthermore, within one year from the date of incorporation, the Nidhi company must have a minimum net owned fund of ₹10 lakhs. Subsequently, it should maintain a minimum net owned fund of ₹20 lakhs or more.
A Nidhi company is permitted to open up to three branches within the district, but only if it has continuously earned net profit after tax during the immediately preceding three financial years. It may also open branches within the state where its registered office is located. However, it is not permitted to open branches in another state.
Deposit Norms
A Nidhi company accepts deposits from its members, which can be in the form of fixed deposits, recurring
deposits, or savings accounts. However, a Nidhi company is not permitted to open current accounts.
The acceptance of deposits by a Nidhi company is subject to certain conditions. One such condition is that the company must maintain and continue to maintain a net-owned fund-to-deposit ratio of 1:20 based on its last audited financial statements. This means that a Nidhi company can accept deposits up to a maximum of 20 times its net-owned fund.
The term “Net Owned Funds” refers to the aggregate of the paid-up equity share capital and free reserves, reduced by accumulated losses and intangible assets as stated in the last audited balance sheet.
Let’s consider the example of Apex Nidhi Limited, which has a net owned fund of ₹2.50 crores as of 31/03/2023. In this case, based on the Nidhi company regulations, Apex Nidhi Limited can accept deposits from its members up to a maximum amount of ₹50 crores. This calculation is derived by multiplying the net owned fund of ₹2.50 crores by the deposit ratio of 20 (i.e., ₹2.50 crores x 20).
A. Fixed Deposit– Deposits in a Nidhi company can be accepted for a minimum period of 12 months and a maximum period of 60 months. Regarding the interest rates offered on fixed deposits, a Nidhi company is not allowed to exceed the maximum rate of interest prescribed by the RBI which the NBFCs can pay on their public deposits. A maximum rate of interest of 12.50% may be offered to depositors by NBFCs.
B. Recurring deposit – In the case of recurring deposits, the tenure shall be a minimum of 12 months and a maximum of 60 months. However, when it comes to recurring deposits relating to mortgage loans, the maximum tenure will correspond to the repayment period of the loan granted by the Nidhi company.
Additionally, the interest rate offered on recurring deposits should not exceed the rate of interest prescribed by the RBI which the NBFCs can pay on their public deposits. The maximum rate of interest notified by RBI for this purpose is 12.50%.
C. Saving deposit – The maximum amount that qualifies for interest in this account at any point in time is ₹1 lakh. The interest offered on this account cannot exceed 2% per annum above the rate of interest provided by a nationalized bank.
Foreclosure of fixed or recurring deposit
Lock-in Period: The lock-in period for the deposit is three months from the date of its acceptance. This means that the depositor cannot withdraw the deposit before the completion of the three-month period.
Withdrawal after Three Months: If the depositor requests to withdraw the deposit after the three-month lock-in period, they will not be entitled to any interest for up to six months from the date of the deposit. This implies that if the depositor withdraws after three months but before six months, they will not receive any interest on the deposit.
Reduction in Interest Rate: If a depositor requests repayment from Nidhi before the maturity period expires, the interest rate will be reduced by 2% from the rate Nidhi was originally obliged to pay interest. This means that if a depositor requests early repayment, they will receive a reduced interest rate compared to the original agreed-upon rate.
Premature Repayment in Case of Death: In the event of the depositor’s death, if a nominee or legal heir requests premature repayment of the deposit, the interest shall be paid at the normal rate. This implies that in case of the depositor’s demise, the nominee or legal heir will receive the full interest amount based on the agreed-upon interest rate.
Investment in Unsecured Term Deposits
Every Nidhi company is required to invest in unsecured term deposits with a Scheduled Commercial Bank or post office deposits, excluding Co-operative banks or regional rural banks. The amount invested in such term deposits should be at least 10% of the total deposits outstanding as of the end of business on the last working day of the second preceding month.
Lending Norms
A Nidhi company is allowed to provide loans exclusively to its members. The loans sanctioned by the Nidhi company to its members are subject to specific terms and conditions. The loan amount offered depends on the total amount of deposits as per the last audited annual financial statement.
1. Here is the table representing the ceiling on loans sanctioned to a member based on the deposit balance:
|
The total deposits of a Nidhi |
Amount of loan to a member | |
| (i) | Less than ₹ Two crores | ₹ Two lakhs |
| (ii) | More than ₹ two crores but less than ₹ twenty crores | ₹ Seven lakh fifty thousand |
| (iii) | More than ₹ twenty crores but less than ₹ fifty crores | ₹ Twelve lakhs |
| (iv) | More than ₹ fifty crores | ₹ Fifteen lakhs |
Additionally, it should be noted that a Nidhi company is restricted from granting any fresh loans that exceed 50% of the maximum loan amounts specified in the respective clauses (i), (ii), (iii), or (iv) if it has not recorded continuous profits in the three preceding financial years. Furthermore, a member of a
Nidhi company will not be eligible for any further loans if they have previously borrowed from the Nidhi and defaulted on repayment.
2. Securities for loan
A loan to its members can be sanctioned against security. However, the limited asset is considered as a security. These are as follows
a) Gold, silver, and jewelry: The repayment period of such loan cannot be more than one year);
b) Immovable property: The loan shall not exceed 50% of the value of the property. It means 50% will be the margin. The repayment period cannot be more than seven years.
c) Fixed deposit receipts, National Savings Certificates, other Government Securities, and insurance policies: The maturity date of such securities shall not fall beyond the loan period or one year whichever is earlier. Loan against fixed deposits, loan tenure shall not exceed the unexpired period of the fixed deposits.
Rate of Interest on a loan extended to members
The rate of interest on any loan sanctioned by a Nidhi shall not exceed 7.50% above the highest rate of interest offered on deposits by Nidhi and shall be calculated on the reducing balance method.
Maximum Rate of Interest on Loan = 7.5% + Maximum rate offered on deposits. Let us also understand this by way of example:
| Fixed Deposit’s interest rate (a) |
Recurring Deposit’s interest rate (b) |
Saving interest rate (c) |
The highest of (a), (b), & (c) is |
Margin | The maximum rate of interest on the loan |
| 7.40% | 6% | 5% | 7.40% | 7.50% | 14.90% |
| 6% | 7.50% | 4.50% | 7.50% | 7.50% | 15.00% |
| 8% | 6.50% | 8.50% | 8.50% | 7.50% | 16.00% |
The rate of interest on the same class of loan must be the same for all members. The rates of interest of all classes of loans shall be prominently displayed on the notice board at the registered office and each branch office of Nidhi.
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