Definition: The Mutual Benefit Finance Companies also called as “Nidhis”, are the non-banking finance companies that enable its members to pool their money with a predetermined investment objective. The main sources of funds are share capital, deposits from its members, deposits from the general public.
In other words, any company which has been notified by the Central Government as Nidhis under the section 620A of Companies Act, 1956 work as a mutual benefit finance company. These are one of the oldest forms of non-banking finance companies wherein the owners of the company are also its clients and pool their resources with the intent to secure loans at a low interest rate at the time the funds are required.
Often, the mutual benefit finance companies give loans to its members for several purposes such as marriages, child education, construction, repayment of old debts, etc. and offer several saving schemes. Also, it offers the credit facility to those members who are not able to raise funds from the commercial banks. Thus, the fundamental objective of Nidhis is to encourage members to save their money and secure loans at a considerable low-interest rate.
Like any other mutual-fund company, Nidhi also has the fund manager who invests the pooled funds of its members in the specific securities, bonds, shares and other money market instruments with an objective to maximize the returns for its members and reduce the risk of loss. The mutual company’s profits are distributed among its members in the proportion of their individual contributions or exposures to the firm. Most often, the insurance companies are structured as the mutual benefit finance companies.