You can think that Nidhi Company and Chit Funds are interchangeable if we compare them. However, their divergent modes of operation were what set them apart. An Indian corporate entity type that is a form of the non-banking finance sector is called a Nidhi Company. This form of business’s functions includes loan lending and deposit-taking. There is a restriction attached to this though, as only members of the Nidhi Company are permitted to engage in this kind of activity.

On the other hand, Chit funds aren’t actual businesses. But instead, they are rotating finance schemes. It is a savings program whose objective is to unite borrowers and savers on a single platform. Regarding what it actually means, different people may interpret it differently. A chit fund is viewed by some as a loan scheme also. For others, it is a method of deposit and investing for some people.

Let us understand in detail what is a Nidhi Company and Chit Funds and what are the main differences between them.

What is a Nidhi Company?

Nidhi Company is a program that is managed by the government and is intended to serve the interests of small and medium-sized businesses. The foundational elements of a Nidhi business are governed by the Ministry of Corporate Affairs. According to Section 406 of the 2013 Companies Act, a Nidhi company is a specific type of entity recognized in the non-banking financial industry. Their main activity is the lending and borrowing of money among their members. Additionally, they are thought of as Benefit funds, Permanent Funds, Mutual Benefits, and Mutual Benefit Funds Companies. In simple terms, it can be called a business established with the goal of instilling a culture of financial responsibility among its participants and accepting deposits from and lending to them for their mutual gain. 

Nidhi Companies are governed by the of Nidhi Rules, 2014. They are authorized as a Public Limited Company. They must therefore adhere to two sets of requirements: one for Public Ltd. companies under the Companies Act of 2013^[1] and another for Nidhi norms of 2014. The legalization of such a corporation is not subject to Reserve Bank approval.

Overview of Chit Funds

Chit Funds are type of savings and borrowing instrument. For more than a century, it has been a component of the Indian financial system. In this scheme, a group of people makes regular contributions to the chit value over a period of time equal to the number of investors, often known as members or subscribers. After deducting the organizer’s commission, the leftover money is divided equally among the remaining members as dividends after the invested amount is auctioned to the lowest bidder. The recipient of the funds is chosen either randomly through a lottery system or through an auction. 

An illustration will help you better understand this: If there are 20 members in a chit fund scheme and everyone pays a monthly installment of INR 5,000, the capital for the first month will be INR 100,000.

During the auction, the participant who placed the highest discount bid receives the sum designated as prize money. Therefore, if the maximum discount is INR 25,000, the winner will receive INR 75,000 in prize money. After removing the organizer’s charge, which is normally 5% of the chit value, or INR 5,000, the discount money, INR 20,000, is divided equally among the 20 members. The chit fund serves as a financing arrangement for the winner and gives the remaining participants profits on their investments (INR 1,000 in this case).

While other members, including the previous winners, continue to donate their monthly installments, this procedure is repeated for the following 19 months, ending when each member has had the opportunity to receive the auction sum. As in the aforementioned example, the borrowers continue to receive the dividend. As a result, everyone contributes the same amount of money toward the conclusion of the chit group’s life cycle, but what they receive varies on when they take it.

As an illustration, the winner of the prize, in the beginning, would receive INR 75,000, but the winner who waited until the end would receive INR 95,000 by offering a smaller discount. But throughout the entire period, both parties will pay about INR 85,000.

The key difference between a Nidhi Company and Chit Funds

Conclusion – Nidhi Company and Chit Funds

Investing money in any company requires an equal amount of a safe and dangerous game involved in it, and to gauge it, is in the hands of the investor. There is a difference between investing money in  a Nidhi Company and in a Chit Fund. Members of Nidhi Company and Chit Fund Company can experience financial freedom with less risk, thanks to these companies. Additionally, these options give the unbanked population a hassle-free way to meet their financial needs. However, because of their regulated company structures and stringent standards, Nidhi enterprises are a little more reliable. Chit Fund companies as a whole have a bad history of providing end users with trustworthy services. Thus to have a clear difference betwwen Nidhi Company and Chit Funds you can contact Bizadvisors Professionals to assist you with the matter.

Read our article:A Complete Difference between Nidhi Company and Micro Finance Company