Introduction: Nidhi Company Vs NBFC Company

India is a great platform for emerging businesses giving rise to the need for both encouraging savings and providing loans. With the nationalized banks it becomes quite easier to opt for both savings and lending. But what if someone wants to start their business in finance? What all options are available or what to choose? We have numerous options available to start the finance business like- MIF, Nidhi Company, NBFC, etc. The most common to register is Nidhi Company and NBFC.

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Nidhi Company is a company aiming to develop the habit of savings and providing funds to their members in case of need. It can be started with small or with less capital. Whereas NBFC Company can only provide loans to the needy and requires huge capital investment.

Both types of entities have many advantages as well as some restrictions on them. However, Nidhi Companies have some more restrictions that NBFCs don’t have. NBFCs have the benefit of some extended roles and benefits to the customer over Nidhi Companies.

When both are equally best on their terms, then what to choose between them in order to run a financial business? Let’s check out.

What is Nidhi Company?

Nidhi Company is governed under section 406 of the Companies Act 2013. These companies are incorporated with the sole object of encouraging the habit of saving among its members by providing them the benefit of deposits, RD, and FD. These companies are also allowed to do the lending business but are limited to their members only. These companies have “NIDHI LIMITED” as a suffix in their names so that they can be easily recognized. These companies serve as a bridge and help the government to reach out to those areas which are still devoid of nationalized banks and NBFCs.

Nidhi Company is considered a mutual benefit organization that can’t be categorised as commercial company.

Eligibility for Nidhi Company

• Minimum capital - INR 5 lakh
• Minimum 3 directors and 7 members
• No minors are allowed to be a member
• Nidhi Company have to increase their member to 200 within 1 year of its incorporation
• Within 1 year the bet owner funds must be INR 10 lac
• The deposit should not be lower than 10% of the outstanding deposits.

What is NBFC Company?

NBFC Company is incorporated under the Companies Act 2013 and is regulated under RBI. These companies have the sole objective of lending business or providing credit to individuals or business holders. These have a restriction of not accepting credit from anyone.

Eligibility for NBFC Company

• Minimum net owned funds INR 2 crore
• Not allowed to take deposits
• The objective of the company should be as per Section 45I(a) of the RBI Act,1934
• CIBIL defaulters can’t be part of the board

Differences

Nidhi companies are incorporated basically to encourage the habit of savings among the people and to provide credit or loans to its members in need. Whereas the NBFCs are incorporated to provide with the financial assistance section of that society who are in requirement of it. However, these are restricted from accepting deposits from anyone.

• Other activities allowed: Nidhi is not allowed to start any activity or transactions other than those mentioned in the Nidhi Rules 2014.
• Acquire securities: Nidhi cannot acquire securities as a form of stock or share whereas NBFCs can do.
• Chit fund or hire purchase business:  Nidhi cannot perform chit fund and hire leasing business whereas NBFCs can do.
• RBI license requirement: Nidhi do not require RBI approval for commencing the business however it's mandatory for NBFC to have prior approval of RBI before commencing the business.
• Issue of Preference Share Capital: Nidhi can’t issue Preference Share Capital for raising funds. Nidhi raises funds from accepting money from deposits or RDs or FDs. However, NBFC can issue both types of share capital i.e. Preference Share Capital or Debenture.
• Current Account Opening: Nidhi are not allowed to open a current account. It’s mandatory for NBFCs to open a Current Account.
• Opening branch: Nidhi are restricted from opening branches till the time they have profit for consecutive 3 years. Even after the profit these can operate with only 3 branches in a district only by the approval from the Registrar of Companies (ROC). However, NBFC are not restricted by such approval they can open as many branches.
• Pay any brokerage: Nidhi is not allowed to pay any brokerage for the mobilization of deposits from the member
• Investment from outside: Nidhi are not allowed to have any investment from investors but allowed from their members. Whereas NBFCs can have such investments.
• Service area of work: Nidhi is allowed to work only within the state in which its registered office is located. However, it is not in the case of NBFC, they can work across India.
• To enter into a new entity: Nidhi cannot enter into a Partnership or any other business for borrowing or lending purposes. Whereas there is no such restriction for NBFC.

Takeaway

Concept of running a financial business rising day by day in India. Out of the many options to register a financial business Nidhi and NBFCs are most preferred. However, Nidhi Companies have certain benefits over NBFCs. Apart from this Nidhi Companies also has some restrictions which ultimately effects on the growth of the business. Whereas the NBFCs are the extended financial services many benefits which ultimately provide them with good economic growth. NBFCs benefit are not only limited to the profit to the members but also plays a vital role in benefit the economy.

One has to choose from the multiple options present. The choice is based on multiple factors like capital available, business objective, type pf credit to offer, etc. It always better take a experts advice. Feel free to call Corpseed.