How NBFC is different from Nidhi and Micro Finance Company?

Sonal Pruthi

06 Sep, 2022

NBFC is a company registered under the Companies Act, 2013. NBFC is regulated by the Reserve Bank of India (RBI).  It is defined under RBI in Section 45-IA of RBI Act, 1934 that NBFC is a non-banking financial institution whose main business is lending of loans or receiving of deposits in any arrangement. This article is explaining the difference between NBFC & Micro Finance Company.

It is a kind of bank which is providing banking services. The main functions of NBFC are lending loans, receiving deposits; acquisitions of shares, debentures, stocks issued by the government or other marketable securities, leasing, or hire purchase agreements are entered by them. However, the core business cannot be sale or purchase of immovable property or its construction. It cannot include any business activity or agricultural activity, or any other industrial activity.

It provides financial support to business houses and individuals. It gives loans, working capital loans, personal loans, shared investments, leasing and also engaged in the insurance business.

Roles of NBFC

• The role of NBFC has been to fix the financial gap, between the organized and unorganized sector to business and individuals.
•  Banks have grown to provide mid-size capital loans to the companies and MSME’s based on their credit score.
•  NBFC have come up to provide banking like facilities, such as quick loans to the companies and individuals.
• In India, the credit score history is 1 out of 10, which makes them eligible for the availability of credit/ loans from the banks.  It is simple to get quick loans from NBFCs.

Nidhi Company

A Nidhi Company is a type of non-banking financial company. It is covered under section 406 of the Companies Act, 2013^[1]. It is a company whose business is the lending of loans or the receiving of deposits is done between only its members, for their mutual benefit. It is a company that is a public limited company and governed by the rules of a central government for such class of companies. The government defines its transactions from time to time.

Roles of Nidhi Company

• It is governed under Nidhi Rules, 2014, whose main objective is to create a habit of thrift and saving of its members, for the purpose of lending to its members only.
• Their duty is to deal with their shareholder members only.
• The main function is lending and borrowing.
• They are permitted to do business like chit funds, Hire Purchase Agreement, Insurance business, or any other business that is involved in the investment of shares or debentures (stock).
• They barred from opening current account of its members, as no other business can be done.

Read our article:A Brief Comparison on Nidhi Company vs NBFCs

Microfinance Company

Microfinance companies are commonly termed as microcredit, or micro benefit organization. They are mostly registered in the section8 of the Companies Act, 2013.

The micro finance company is a type of, non-banking financial intuition whose business is to provide loans. The main objective is to give small scale financial services, in the format of loan, or credit facilities, or savings facility.

There are two types of a microfinance company which has been allowed in India, one which has to be registered with RBI and the other like a non-profit organization which has to be first registered as the Section 8 Company under the Companies Act, 2013 and where no approval of RBI is required.

Roles of Microfinance Company

• They provide loans/offer loans to small business houses.
• Where they do not have access to the banking channels or eligibility of loans.
• They provide a barest and minimum amount of loans like of Rs50, 000 for rural areas and for Rs.1, 25,000/- for the urban areas.
• They do not take any guarantee securities or do not even charge marginal money from the clients.
• The loans offered by the microfinance company at the lowest possible rate as directed by the RBI (no excessive rate of interest) could be charged.
• There is great popularity of the microfinance companies in rural areas. They are supported by the government. As they create huge employment and increases the rural and agricultural development.

Conclusion

It can be concluded that:

1. A Nidhi company cannot conduct business except those mentioned in the scheme. Whereas NBFC can do acquisition of the securities in the form of stock. However, a micro finance which is like NBFC but cannot acquire business.
2. NBFC requires the previous approval from RBI and so is the micro finance company which requires previous approval of RBI for conducting business. However, a Nidhi Company does not require the approval of conducting business of lending.
3. Nidhi Company is not required to open the Current Accounts of its client. But NBFC and microfinance can open the current account of its clients.

Read our article:Non-Banking Financial Company vs Micro Finance Institution