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11 Advantages NBFC in India have over Nidhi Companies

Narendra Kumar

| Updated: Feb 11, 2019 | Category: NBFC, Nidhi Company

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NBFC in India and Nidhi companies are seen to be functioning at larger and smaller platforms respectively. However, from the expert’s point of view, NBFCs (Non-Banking Financial Companies) are reigning the business sector because of its extended roles, functions, and benefits over Nidhi companies. Further, in this blog, we will talk about what Nidhi Companies cannot do, but NBFCs can do.

NBFC in India vs. Nidhi – What you must know?

NBFC is basically the Non-Banking financial Companies which provide similar services as that of the conventional Bank except issuing the demand drafts and cheques. It basically renders the financial services to individuals and businesses. NBFC in India is majorly known for quick loan processing in comparison to the bank. NBFC plays an integral part in our country’s economy.

  • While Nidhi Company belongs to the non-banking financial sector (NBFC), and these companies are incorporated to encourage the habit of saving and create funds amongst its members.
  • Nidhi Company registration norms and rules are less strict. It doesn’t require any approval from the Reserve Bank of India.

But there are few limitations of Nidhi Companies. If you are thinking of owning a Nidhi Company then you must keep all these restrictions in mind. In the long run, you may not be able to grow your Nidhi Company in the way you might be thinking. So it is advisable to form an NBFC over a Nidhi Company. For more information, you can read our blog on Nidhi Company vs. NBFCs

What are the privileges of NBFCs over Nidhi Companies?

Nidhi Companies are gaining a lot of popularity because of its lesser capital requirement which is just around Rs. 5 lakh for starting the business. However, this also limits the capability, roles and powers of Nidhi companies in comparison to the NBFC in India.

NBFCs are governed by the Reserve Bank of India[1] (RBI) and a net worth of Rs. 2 crores is required to start the finance business. Below are the 11 things Nidhi Companies cannot do as an NBFC in India.

  • Nidhi Companies cannot do any other business

If you have a Nidhi Company, it won’t be able to carry out the business of chit funds, hire purchase finance, lease finance, insurance or acquisition of securities issued by the Body Corporate. As Nidhi Companies are a special type of company in itself which carries a predefined business and hence it is not allowed to pursue the business of any other type.
And even to register a vehicle finance business, chit fund companies or microfinance companies, you have to get a separate license from local body or RBI, and that would depend upon case to case basis.

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  • Cannot open a branch before three years

For opening a branch of Nidhi Company in India, it has to earn profits continuously for the next three years. It is one of the mandatory conditions and this cannot be compromised even if you have sought permission from the Registrar of Companies (ROC). While in the case of NBFC company in India there is no such requirement.

  • No provision of Preference Share Capital

In Nidhi Companies, raising funds byways of preference share capital or debentures is not allowed. Nidhi Companies are allowed to take deposits from the general public, but they cannot raise funds from any other source.

  • Dealing with the members only

Nidhi Companies are not allowed to deal with a person, who is not a part of a Company. Nidhi Companies can only lend or accept money from their members.

  • No Advertisement or Solicitation

Nidhi Companies cannot advertise or solicit any person for deposits. But at the same time, Nidhi companies can advertise for granting the loan to different people. A lot of discussions have been held on this issue, but in accordance with the law, a Nidhi Company is not restricted from advertising to lend money to people. It is considered to be one of the major loopholes of the Nidhi Companies.

  • No Brokerage or Incentive

Nidhi Companies cannot pay any brokerage or incentive for the mobilization of deposits from members or for the deployment of funds or for granting loans. Nidhi companies can hire and keep employees on fixed salaries as it is not restricted by the law.

  • Cannot open a current account

Nidhi Companies are not allowed to open Current Account with the members. Nidhi Company is not treated as a commercial company. It is considered as a mutual benefit company and hence the government does not want these Nidhi companies to commercialize.

  • No service charge on the memberships

While issuing any shares, a Nidhi Company cannot charge any service charge from its members. However, these Nidhi Companies are allowed to charge processing fees on loans as this is not restricted under the Nidhi Rules.

  • No Partnership is allowed

Nidhi Companies are not allowed to form or enter into a Partnership firm for borrowing or lending activities.

  • Limited within a State

Nidhi Companies are not allowed to open a branch outside the state of functioning. It has been specifically restricted by the Nidhi Rules, 2014. Hence your Nidhi Company is just a brand inside a State.

  • Cannot add Body Corporate

Nidhi Companies cannot add anybody corporate-like private limited companies can do. Because the members of Nidhi Companies cannot accept deposit from these bodies corporate. And not only this, but they are also not allowed to accept money as an inter-corporate deposit from another company.

Conclusion:

Nidhi Companies have a number of shortcomings, limitations. However, we still see it as a soaring concept in India, especially in South India. But Nidhi is still a Puzzle for a lot of us and it is always advisable to seek expert help before jumping to the conclusion. On the other hand, NBFC in India offer a wide range of financial services such as loans, chit-funds, and these are different from banks. These NBFCs are playing a crucial role in a developing country like us. The Executive Director of the Reserve Bank of India, P Vijaya Bhaskar has explained in one of his speeches that NBFC companies are game-changers that are really important to our country’s economy. For NBFC registration or any information regarding NBFC or Nidhi Company, please contact Enterslice.

Also Read:
Non-Banking Financial Company vs Micro Finance Institution
NBFC vs Bank : How to Select One While Shopping for Loans

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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