Nidhi Company vs Microfinance NBFC – Key Differences

Introduction

In India, financial inclusion has become a major focus over the past few decades. Two popular models that serve low-income groups and small borrowers are Nidhi Companies and Microfinance Non-Banking Financial Companies (NBFC-MFIs). At first glance, both seem similar — they encourage savings and provide loans — but in reality, they are vastly different in terms of legal structure, regulation, and operational scope.

For entrepreneurs and community groups, it is important to know the difference between these two before choosing which model to adopt. This article explains the objectives, legal requirements, compliance, and pros & cons of Nidhi Companies and Microfinance NBFCs.

What is a Nidhi Company?

A Nidhi Company is a Public Limited Company registered under the Companies Act, 2013 and governed by the Nidhi Rules, 2014. Its main purpose is to encourage the habit of savings among its members and provide loans to them.

Key Features:

• Works only with members (closed group).
• Does not require RBI license.
• Must have “Nidhi Limited” at the end of its name.
• Focused on mutual benefit lending.
• Compliance involves filing NDH-1, NDH-2, NDH-3, and NDH-4 with ROC.

What is a Microfinance NBFC (NBFC-MFI)?

A Microfinance NBFC is a type of Non-Banking Financial Company registered under the Companies Act, 2013 and regulated by the Reserve Bank of India (RBI). Its objective is to provide small loans (micro-credit) to low-income individuals, typically without collateral, to support self-employment and income-generating activities.

Key Features:

• Requires RBI approval and registration as NBFC-MFI.
• Provides loans to borrowers with low income, even if they are not shareholders.
• Can operate nationwide.
• Must maintain minimum Net Owned Fund (NOF) of ₹5 crore (₹2 crore for North Eastern states).
• Subject to RBI’s prudential norms like capital adequacy, interest rate caps, and loan eligibility.

Nidhi Company vs Microfinance NBFC – Detailed Comparison

Basis of Difference	Nidhi Company	Microfinance NBFC (MFI)
Objective	Encourage savings & lending among members only.	Provide small loans to low-income groups for livelihood.
Regulatory Authority	Ministry of Corporate Affairs (MCA).	Reserve Bank of India (RBI).
Legal Provision	Companies Act, 2013 + Nidhi Rules, 2014.	Companies Act, 2013 + RBI NBFC-MFI Directions.
Members / Clients	Only members (minimum 200 required in 1 year).	General public (borrowers), usually women & small entrepreneurs.
Capital Requirement	Minimum paid-up share capital ₹5 lakh (to be increased as per new rules).	Minimum Net Owned Fund ₹5 crore (₹2 crore in NE states).
Loan Limit	Restricted by Nidhi Rules (loan amount depends on deposits).	RBI guidelines allow loans up to ₹1.25 lakh per borrower.
Deposit Acceptance	Allowed from members only.	Not allowed – MFIs cannot take public deposits.
Scope of Activities	Very limited – only deposit & lending among members.	Wider – lending to poor households, SHGs, women entrepreneurs.
Tax Benefits	No special benefits.	Normal NBFC taxation, but eligible for priority sector lending support.
Compliance	ROC filings (NDH-1, 2, 3, 4) + annual returns.	RBI compliance + periodic returns + statutory audit.
Credibility	Limited, community-based recognition.	Higher credibility due to RBI regulation.

Advantages of Nidhi Company

1. Simple Registration – No RBI license required.
2. Low Capital Requirement – Can be started with ₹5 lakh.
3. Mutual Benefit Model – Builds trust within small communities.
4. Cost-Effective Compliance – Compliance is lighter compared to NBFC.

Advantages of Microfinance NBFC

1. Wider Reach – Can serve anyone, not just members.
2. RBI Regulated – Higher trust among borrowers and investors.
3. Larger Loan Capacity – Can disburse higher amounts compared to Nidhi Companies.
4. Eligible for Bank Funding – Banks classify lending to MFIs as priority sector lending, making it easier for them to raise funds.

Challenges in Nidhi Company

• Limited to members only.
• Cannot advertise deposits.
• Restrictions on lending amounts.
• MCA crackdown on non-compliant Nidhis.

Challenges in Microfinance NBFC

• High capital requirement (₹5 crore NOF).
• Strict RBI compliance.
• Interest rate regulation.
• Needs professional management team.

Which is Better?

• If your goal is small community savings and loans with minimal regulatory burden, a Nidhi Company is suitable.
• If your goal is large-scale financial inclusion, working with poor households, and attracting external funding, then a Microfinance NBFC is better.

Example:

• A group of traders pooling money in a town → Nidhi Company.
• An institution lending micro-loans to women in villages for starting small businesses → Microfinance NBFC.

FAQs

Q1. Can a Nidhi Company convert into an NBFC-MFI?
No, they are separate structures with different legal and regulatory frameworks.

Q2. Can Nidhi Companies lend to non-members like NBFCs?
No, they are strictly restricted to lending within their members.

Q3. Which has more credibility with banks and investors?
Microfinance NBFCs, because they are regulated by the RBI.

Q4. Can NBFC-MFIs accept deposits like Nidhi Companies?
No, NBFC-MFIs cannot accept public deposits.

Q5. Which is easier to start?
A Nidhi Company is easier and cheaper to start. An NBFC-MFI requires higher capital and RBI approval.

Conclusion

Both Nidhi Companies and Microfinance NBFCs play important roles in India’s financial system. A Nidhi Company is best for community-based savings and lending with low compliance requirements, while a Microfinance NBFC is ideal for large-scale financial inclusion projects with RBI credibility and funding access. The choice depends on your vision, capital availability, and target audience.

👉 For a small community or business group – go for a Nidhi Company.
👉 For scaling financial services and working with rural poor – choose a Microfinance NBFC.