Following the implementation of the Sabanayagam Committee's recommendations, Nidhi companies raised significant concerns regarding their ability to adapt to the new regulatory framework, especially in areas like compliance timelines, deposit limits, and operational constraints. To address these issues, the government convened an expert group with A. R. Rao, Former Chairman, Income-Tax Settlement Commission, as chair to reassess the framework and propose adjustments that would balance regulatory requirements with the operational realities of Nidhi companies. Members included N. Sadasivan (Executive Director, RBI); T. S. Gokilan (President, Chamber of Nidhis); S. Gopalakrishnan (Vice-President, Chamber of Benefit Funds); V. S. Rao (Regional Director, DCA); and Rajesh Malhotra (Deputy Secretary, DCA). Nidhi companies are mutual benefit societies, primarily operating in southern India, that accept deposits from and lend to their members exclusively. The group focused on 18 critical issues, proposing modifications and extensions to facilitate smoother transitions for these institutions to the changed regulatory framework. Notably, the group emphasized the need for a regulatory framework while acknowledging the unique operational characteristics of Nidhis, which primarily cater to the financial needs of the middle- and lower-middle-class populations in localized areas.
Key recommendations included maintaining the status quo for the face value of shares for existing and potential Nidhis while mandating a INR 10 face value for new companies’ shares. The group suggested modifying the restriction on preferential allotment of shares to allow an allotment up to INR 100 for new depositors and borrowers. Furthermore, it proposed retaining the prohibition on prepaid interest warrants and including preference share capital in the net-owned-fund calculation until December 2003, with subsequent redemption or conversion to equity shares. The group also recommended phased adjustments to the ratio of net owned funds to deposits, providing extended deadlines for compliance based on the existing deposit ratios of the companies.
The expert group’s recommendations aimed to balance regulatory compliance with practical considerations, ensuring that Nidhis could adapt without jeopardizing their operational stability. They advocated maintaining certain restrictions, such as those on foreclosure of deposits and interest rate margins, while proposing relaxations, such as extending mortgage-loan periods to seven years and allowing recurring deposit tenures to align with mortgage loans. Additionally, the group advised against the mandatory publication of annual accounts in newspapers, recommending instead including an abridged balance sheet in application forms. Overall, the group’s proposals sought to enhance the professional management of Nidhis, safeguard the interests of depositors, and ensure the long-term viability of these institutions.
Following the report, the Department of Corporate Affairs issued a notification revising the prudential norms for Nidhi companies. Effective immediately, no provision was required for standard assets on mortgage loans. Provision percentages were set at 10 percent for substandard assets, 25 percent for doubtful assets, and 100 percent for loss assets. It also established a 1:20 ratio of net owned funds to deposits, with phased targets for higher ratios through 2007. Additionally, loans against immovable property were capped at 50 percent of the property’s value with a maximum period of seven years. Ceilings on interest rates on deposits and loans were to continue.
The expert group’s recommendations sought to strike a balance between maintaining regulatory rigor and addressing the unique challenges of Nidhi companies. These measures aimed to ensure the long-term sustainability and professionalization of Nidhi operations while safeguarding depositor interests and fostering financial inclusivity for middle- and lower-middle-class communities.
