Restrictions on loans given by Nidhi Companies

With the increase in demand of credit in the country, the Ministry of Corporate Affairs came up with the concept of Nidhi Company wherein the word Nidhi means ‘treasure’  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. Further, unlike Non-Banking Financial Company (NBFCs) and Banks, these Companies does not require registration certificate by Reserve Bank of India (RBI) to operate.

Banks and Non-Banking Financial Institutions form a strong backbone of our economy however, they are still not in reach of people requiring funds specially those of living in rural areas or are lack of requisite documentation like Income Tax return and the like. Therefore, Nidhi Companies are a boon to such people as it provides easy finance. However, the Nidhi Rules, 2014 places certain restrictions on Nidhi Companies to give away loans and in article, we shall about the “restrictions on loans given by Nidhi Companies”.

I. PRELIMINARY CONDITIONS TO GRANT LOANS:

• No person other than members of a Nidhi Company shall be eligible to accept loans. Further, with respect to the membership of Nidhi Companies as well, there are following restrictions:

√ A Nidhi shall not admit a body corporate or trust as a member.

√ A minor shall not be admitted as a member of Nidhi

• The maximum of loan amount that can be given away by a Nidhi Company is linked with the deposits accepted by it i.e. explained in the table given below:

However, in the event the Nidhi Company has not earned profit during preceding three years, the eligible loan amount shall be only 50% of what is mentioned above i.e. Rs. 100000, Rs. 375000, Rs. 600000 and Rs. 750000 respectively.

• Only secured loans can be given to the members.
• It shall not pay any brokerage or incentive for deployment of funds or for granting loans.

II. SECURITY AGAINST SUCH LOANS:

• gold, silver and jewellery;
• immovable property;
• fixed deposit receipts, National Savings Certificates, other Government Securities and insurance policies.

III. PERIOD AND TERMS OF REPAYMENT

The period and terms of repayment strictly depends on the security mortgaged by the borrower. The same is explain below:

*In case of loan against jewellery, the loan to value ratio shall not exceed 80 percent i.e.  the amount of loan given shall not exceed 80% of the value of the property.

**In case of loans against immovable property, the total loans (against immovable property specifically) shall not exceed 50% of the overall loan outstanding.

IV. RATE OF INTEREST: –

The rate of interest to be charged on any loan given shall not exceed 7.5% above the highest rate of interest offered on deposits. For instance, in case the Nidhi Company is offering 5% rate of interest on fixed deposit and recurring deposit and also 3% on savings, then the Company can chare up to maximum 12.5% on loan given.

Further, the following are the limitations on charging rate of interest from its borrowers:

• It should be charged on reducing balance method only.
• It shall charge the same rate of interest in respect of the same class of loans.
• Rates of interest of all classes of loans shall be prominently displayed on the notice board at the registered office and each of its branch office.

FREQUENTLY ASKED QUESTIONS:

1. Can a Nidhi Company deny granting loan to any member?

A member shall not be eligible for any further loan if he has borrowed any earlier loan from the Company and has defaulted in repayment of such loan.

2. The Nidhi Rules generally protects the right of borrowers and deposit holders only and accordingly, in case of any default of payment on the part of borrowers, what is the remedy available with the Company?

The Company can avail the remedy as provided in the Insolvency and Bankruptcy Code or either other legal proceeding like civil suits, etc.

3. What is the penalty for non-compliance of the aforementioned rules?

The company and every officer of the Company who is in default shall be punishable with a fine which may extend to Rs. 5,000/-, and where the contravention is a continuing one, with a further fine which may extend upto Rs. 5,000/- for everyday for which the default continues after the first one.

4. Suppose, the deposits accepted by the Company is Rs. 5 Crores in one financial year and in the second financial year, the deposits accepted gets reduced upto Rs. 1 crore, then also will the Nidhi Company be eligible to grant loans upto Rs. 7,50,000/-?

No, to what amount a Company can grant loans depends upon the deposits accepted by it as per the latest audited financial statements of the Company.

{The author i.e. Kajal Goyal is a Company Secretary in Practice at Kajal Goyal and Associates and can be reached at (M) 9999952595 and (E) [email protected]}