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M. Ramesh

CHENNAI, Feb. 19

CALL it what you will — a `dhoti-clad financial system' with a decidedly South Indian flavour or a `national heritage' that has been around for over a century — you can't deny that nidhis have, from their small niche, served the country well. But today, they are an endangered species.

The month of March will be a defining period for the nidhis. For, it will become clear next month as to which of these institutions will survive the stringent provisioning norms that have been "brought in too suddenly for comfort." And, it appears that a majority will fall by the wayside.

The panel set up by the Government this week to look into the regulation-related difficulties of the nidhis has not come a day too soon.

The nidhis are NBFCs (non-banking finance companies) with some unique features. They do not lend to non-members — a borrower would have to become a member first.

They extend only personal loans and necessarily against either property or jewels.

Their geographic area of operation is restricted to the suburb they are headquartered in, or at best, the city in which they operate. Despite these bindings (that characterise them), the nidhis have stood the test of time and are alive and kicking.

While a few of the 192 nidhi companies, which have a total business (deposits plus advances) of around Rs 2,500 crore, are centenarians, most of them date to the pre-Independence era.

The 133-year-old Chennai Sri Ekambareswarar Saswatha Nidhi Ltd tops the `vintage list' followed by The Egmore Benefit Society (130 years), The Mylapore Hindu Permanent Fund Ltd (128 years) and The Sriman Madhwa Siddhanta Onnahini Permanent Nidhi (120 years).

But, the collapse of the Royapettah Benefit Fund (RBF) and the Alwarpet Benefit Fund (ABF), as a result of a transgression of prudential boundaries, seems to have completely changed the way in which regulators view the segment as a whole.

The Secretary, Chamber of Nidhis, Mr S. V. Madhusudhan, <170>says: "Those institutions that deviated from the concept of nidhis are all gone today. Those who have managed to stick on are the honest ones." An argument that does not seem to cut ice with the authorities.

The fall of RBF and ABF has led to a host of consequences. The Sabhanayagam Committee constituted to look into how best to regulate the nidhis did not have any representation from the nidhis. The committee's recommendations form the basis for the regulatory framework of the nidhis. It was decided that the Department of Company Affairs (DCA), and not the RBI, would regulate the nidhis.

Already, the nidhis are reeling under the competition posed by banks, which are now getting into jewel and property loans in a big way. They are able to stay on purely on the basis of their nimble operations. But the DCA regulations may prove to be the last nail in the nidhis' coffin.

The regulations

The DCA, on July 26 last year, came out with a series of regulations, which the nidhis see as a body blow to their industry.

First, the DCA ruled that the nidhis cannot collect deposits in excess of 20 times their net-owned funds (NOF). This ruling inverted an earlier stipulation of the RBI, which said that the 1:20 ratio would hold for incremental deposits alone. The DCA made it "all deposits." But the catch is that they would have to achieve this ratio within two years, or before July 26, 2003.

To comply with this norm, the nidhis would have to either raise capital to increase their NOF or return excess deposits. Both options are unviable, given the market conditions.

Today, many nidhis hold deposits that are many times their NOF. For instance, the oldest nidhi (Chennai Ekambareswarar) has deposits 58 times its NOF. The Mylapore Hindu Permanent Fund has deposits 411 times its NOF, The Thiruvateeswarar Hindu Janopakara Nidhi 147 times, the Palghat Permanent Fund 86 times and Paraspara Sahaya Nidhi 77 times. The nidhis are in a quandary as to how to reduce their deposits to 20 times their NOF within two years.

On the other hand, it is difficult for nidhis to raise capital as well because many of them do not have a `promoter' to bring in fresh funds. The only option before them is to increase their NOF by way of retained earnings. But, this again, has been made difficult by the imposition of stringent provisioning norms and restrictions on their geographical spread of business.

From this year, nidhis will have to provide 10 per cent on loans that are interest-overdue for 12 months, 50 per cent for 35 months and 100 per cent for three years. The nidhis point out that the strict provisioning norms applicable to banks need not be extended to them because all their loans are fully secured by liquid assets — jewels or property.

The property offered as security is necessarily in the `notified area' which means that the nidhi can auction the same without having to obtain the Courts' permission.

Says Mr Madhusudhan: "Auction happens very rarely, most of the loans are paid off, because the borrower knows that the nidhi can auction the property."Any delay in payment of interest, therefore, is only temporary and the nidhi gets back its loans, says Mr K. N. Bhujanga Rao, President, The Sriman Madhwa Siddhanta Onnahini Nidhi.

There is a fear that the provisioning norms will push the nidhis into the red.For example, a centenarian nidhi whose net profit last year amounted to about Rs 20 lakh, may have to make provisions of about Rs 3 crore this year. Thus, in one stroke of the pen, its net worth will be wiped out!

The Nidhi Chamber has managed to get the Government to constitute a committee to look into these problems. The fate of this age-old industry will depend much upon what the committee recommends.

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