Introduction

Nidhi Companies lend only to their members and always against security, such as gold, property, fixed deposits, or government instruments. A common question is whether the Nidhi can sell or use this collateral if the member refuses to repay the loan.

The Legal Position

Yes, a Nidhi Company can sell or realise the collateral, but only as per law:

• Gold, Silver, Jewellery: Since the Nidhi already holds possession, it can auction or sell them after giving due notice to the borrower. Any extra money after adjusting the loan and interest must be returned to the member.
• Fixed Deposits, NSCs, Insurance Policies: These can be directly encashed or realised by the Nidhi because they are already pledged.
• Immovable Property: This cannot be sold casually. The Nidhi must follow proper legal recovery procedures under the Transfer of Property Act, 1882, usually through a registered mortgage and auction process with court approval.

Safeguards

To protect both the company and the member:

• Loans must be properly documented.
• Notices should be given before sale or auction.
• Surplus from the collateral, if any, must always be returned to the borrower or their legal heir.

Documentation Required for Nidhi Company Loans

Essential Loan Documentation

1. Loan Application Form
   • Filled and signed by the member.
   • Includes loan amount, purpose, tenure, and security details.
2. Loan Agreement
   • A binding contract between the member and the Nidhi.
   • Specifies loan amount, rate of interest, repayment schedule, rights of the Nidhi, and consequences of default.
3. Promissory Note
   • Signed by the borrower, promising to repay the loan with interest.
   • Strengthens the Nidhi’s claim in case of legal proceedings.
4. Security / Pledge Documents
   • For Gold, Silver, Jewellery → Pledge form with weight, purity, valuation, and photographs.
   • For Property Loans → Mortgage deed (registered if required), valuation report, and title documents.
   • For FDs/NSCs/Insurance → Assignment/pledge form duly signed, with certificates handed over to the Nidhi.
5. Board Approval / Sanction Letter
   • A sanction letter issued to the member, recording approval of the loan by the company.
6. KYC and Membership Proof
   • PAN, Aadhaar, photograph, and membership number of the borrower.

Conclusion

A Nidhi Company is legally empowered to recover loans by selling or realising collateral, but this right depends on the type of security and the documentation in place. Movable assets like gold, silver, or securities can be enforced directly, while immovable property requires legal recovery under the Transfer of Property Act. However, such enforcement is only possible if the loan has been properly documented with a loan agreement, promissory note, pledge or mortgage deed, and relevant KYC records.

For promoters and directors, the lesson is clear: take complete documentation at the time of granting the loan and follow compliance strictly. For members, this ensures transparency and protection of their rights, since any surplus realised from collateral must always be returned. Together, these safeguards strike a balance between the Nidhi’s financial security and depositor/member protection.