Nidhi Company Vs. Micro Finance Company: Empowering the Underprivileged through Financial Services. Learn about their differences and significance in uplifting communities.
Introduction
Nidhi Company and Micro Finance Company are both important financial institutions catering to the needs of the middle-class and lower-class individuals. Nidhi Company, a non-banking financial organisation, provides secured investments, minimal paperwork, and lower interest rates, making it a popular choice for many. It offers tax benefits, ease of management, straightforward ownership transfers, and exemptions from stamp duty.
On the other hand, Micro Finance Company offers banking services to underprivileged individuals or groups, granting access to financial services they wouldn’t otherwise have. Microloans, ranging from small amounts to ₹ 25,000, empower the less fortunate and foster self-sufficiency. Many banks also provide additional services like savings and checking accounts, micro-insurance products, and financial education.
What is Nidhi Company?
Nidhi Company, governed by Section 406 of the 2013 Companies Act, operates with a unique purpose of promoting frugal living and prudent money management among its members. It exclusively provides loans to its members, and for incorporation under this section, the company’s name must include ‘Nidhi Limited.’ However, Nidhi Companies are prohibited from engaging in activities like chit funds, hire-buy finance, lease financing, insurance, and acquiring securities issued by other corporations.
On the other hand, Non-Banking Financial Companies (NBFCs) carry out specific activities such as lending, advancing, purchasing government or local authority stocks or shares, leasing, hire-purchase, insurance, and chit business. Unlike Nidhi Companies, NBFCs have a broader scope of financial services and cater to a more diverse clientele.
Understanding the distinctions between Nidhi Companies and NBFCs is crucial for businesses seeking to establish financial institutions or individuals looking for appropriate financial services. While Nidhi Companies focus on empowering their members through loans and disciplined financial practices, NBFCs offer a broader array of financial services to cater to various needs in the market.
What is a Microfinance Company?
Microfinance organisations play a vital role in providing financial services to low-income individuals and groups where access to traditional banking institutions is limited. These organisations cater to the specific needs of economically disadvantaged communities, offering loans and financial support to uplift their livelihoods.
In India, there are two types of microfinance companies allowed to operate. The first type requires registration with the Reserve Bank of India (RBI), adhering to regulatory guidelines to ensure transparency and compliance. The second type operates as non-profit organisations and must be incorporated as a Section 8 Company under the Companies Act, 2013. Unlike the first type, they do not need explicit permission from the RBI to function.
These microfinance organisations serve as catalysts for economic growth in marginalised communities, empowering them to build sustainable livelihoods and improve their quality of life. By addressing the unique financial needs of underserved populations, microfinance contributes significantly to poverty alleviation and socio-economic development.
Basic Difference Between Nidhi Company and Microfinance Company
Microfinance Companies offer a range of financial services, including loans, insurance, and savings, catering to individuals and businesses. They provide crucial funding for small business owners, eliminating the need to rely on traditional sources like banks or investors. Regulated by the RBI, they play a pivotal role in uplifting marginalised communities by offering safe borrowing options for small businesses and providing financial education on prudent spending, bookkeeping, and saving.
On the other hand, Nidhi Companies, as a specific form of non-banking financial entities under Section 406 of the Companies Act 2013, focus on borrowing and lending money exclusively among their members. They promote frugal living and savings habits among their members, offering lower interest rates and requiring a minimum net owned fund of ₹ 5 Lakhs. Nidhi Companies are well-liked in India’s southern region for their commitment to fostering a culture of saving.
Microfinance Companies, serving low-income groups, bridge the gap where traditional financial institutions are inaccessible, particularly in rural communities. With government support, they contribute significantly to rural development, agriculture, and employment opportunities.
Conclusion
Microcredit, microfinance, Nidhi Companies, and NBFCs have opened up opportunities for millions of financially disadvantaged individuals who cannot access traditional banks due to lack of collateral. These financial services, including microloans, micro-savings, micro car finance, and tiny home loans, cater to the unique needs of underserved communities. Microcredit, a significant innovation in financial services, is part of this comprehensive approach.
For any assistance in understanding the distinctions between Nidhi Companies and Micro Finance Companies, feel free to reach out to our legal experts at BizAdvisors.io. We are here to help you navigate the complexities and make informed financial decisions that best suit your needs and aspirations.
FAQs
Is Nidhi Company under RBI?Yes, Nidhi Companies are under the regulatory purview of RBI (Reserve Bank of India) as they fall under the category of non-banking financial companies (NBFCs) and are governed by Section 406 of the 2013 Companies Act. |
Who is the founder of Nidhi Company?The concept of Nidhi Companies dates back to ancient India, and they were not founded by any specific individual. Nidhi Companies are a traditional and community-based form of financial institution aimed at promoting savings and lending among members for mutual benefit. |
Which microfinance company is best?It’s challenging to determine the ‘best’ microfinance company as it depends on individual needs and preferences. Some well-known microfinance institutions include Grameen Bank, SKS Microfinance, and Bandhan Bank, but it’s essential to research and choose based on specific requirements and credibility. |
Who is eligible for microfinance?Low-income individuals or groups who lack access to traditional financial services are eligible for microfinance. Microfinance aims to provide financial assistance to the underprivileged and unemployed to support their livelihoods and small businesses. |
What is the microfinance limit?The microfinance limit varies depending on the microfinance institution and the specific financial product being offered. It typically ranges from small amounts like ₹ 100 to higher amounts like ₹ 25,000 for microloans. |
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