Nidhi Company, Chit funds, RNBC

Nidhi Company

A nidhi company is a type of company in the Indian non-banking finance sector, recognized under section 406 of the Companies Act, 2013. Their core business is borrowing and lending money between their members. They are also known as Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company. They are regulated by Ministry of Corporate Affairs, which is also empowered to issue directions to them in matters relating to their deposit acceptance activities. However, in recognition of the fact that these companies deal with their shareholder-members only. Nidhi means a company which has been incorporated with the object of developing the habit of thrift and reserve funds amongst its members and also receiving deposits and lending to its members only for their mutual benefit.

Nidhi companies existed even prior to the existence of companies Act 2013. The basic concept of nidhi is “Principle of Mutuality” These companies are more popular in South India, and 80% of Nidhi companies are located in Tamil Nadu.

Requirements for Nidhi Company

• A Nidhi company to be incorporated under this Act shall be a Public Company;
• It shall have a minimum paid up equity share capital of 5,00,000/-.
• No preference shares shall be issued.
• If preference shares had already been issued by a Nidhi Company before commencement of this Act, such preference shares are to be redeemed in accordance with the terms of issue of such shares.
• The object of the company shall be cultivating the habit of thrift and savings amongst its members, receiving deposits from and lending to its members only for their mutual benefits.
• It shall have the words ‘Nidhi Limited’ as part of its name

Functions of Nidhi company

• The rules of funding in a Nidhi company is done through the contribution of its forming members.
• Later that money is used to offer loans to its own members according to their needs at very reasonable rates.
• The funds or deposits of a Nidhi company are limited when compared with other banks because they are only able to operate their as they will be working with specific fund base in a limited area.

The Central Government made ‘Nidhi Rules, 2014’ for the purpose of carrying out the objectives of ‘Nidhi’ companies. These rules shall be applicable to-

• Every company which had been declared as a Nidhi or Mutual Benefits under Section 620A(1)of Companies Act, 1956;
• Every company functioning on the lines of a Nidhi company or Mutual benefit society but has either not applied for or has applied for and is awaiting notification to be a Nidhi or Mutual Benefit Society under Section 620A(1)of Companies Act, 1956;
• Every company incorporated as a Nidhi pursuant to the provisions of Section 406 of the Companies Act, 2013.

Chit funds

Chit fund is defined as per the Section 2(b) of the Chit Fund Act, 1982. According to this act; A chit fund is a type of rotating savings and agreement among different persons i.e. friends, relatives, neighbours and family members to subscribe a certain sum of money for a specified period of time. Chit funds are often microfinance organizations. Chit Funds are also known as the Chitty, Kuree, chit.

A chit fund is a type of rotating savings and credit association system practiced in Pakistan, India, Bangladesh, Sri Lanka and other Asian countries. Chit fund schemes may be organized by financial institutions, or informally among friends, relatives, or neighbours. In some variations of chit funds, the savings are for a specific purpose. Chit funds are often microfinance organizations.

Risk

Both organizers and subscribers in chit funds are exposed to credit risk because subscribers might default on their periodic payments. One analysis of data from two chit fund companies found that 35% of subscribers have defaulted at least once during their tenure at one of the companies and 24% of them have defaulted after winning an auction for the pot. Chit fund companies can sue defaulters in court but the procedure is time-consuming and is unlikely to produce a timely settlement. It’s up to the chit fund organizers to vet the credit-worthiness of subscribers. To reduce the risk of default, some organizers also require subscribers who win auctions to submit sureties for their future liabilities.

Since chit fund payments are not insured by the government, the system is a riskier method of saving than using a bank savings account.

Popular Chit Funds in India

Chit funds limit only to India. Normally we do not find chit funds in any other part of the world. Some of the most famous and successful chit fund houses are:

• Mysore Sales International: Government of Karnataka
• Kerala State Financial Enterprise (KSFE): Government of Kerala
• Shriram Chits: Shriram Group
• Margadarsi Chits: Ramoji Rao Group

RNBC

Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being investment, asset financing, loan company.

These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilisation of deposits and requirement of deployment of depositors’ funds. However, Prudential Norms Directions are applicable to these companies also.

• They offer a rate of interest of not less than 5% per annum on term deposits and 3.5% on daily deposits both compounded annually.
• They can’t accept deposits for a period less than 12 months and not more than 84 months.
• They can’t offer any gifts or incentives to solicit deposits from public.
• They can’t accept deposits repayable on demand, i.e., they cant open saving or current accounts.