Large nidhis: An anachronism

Suresh Krishnamurthy

THE recommendation of the Sabhanayagam Committee report on nidhis appears to favour a continuation of the concept of large nidhis.

If the ambitions of the nidhis is to serve a larger geographic area, then, they are entering the territory of non-banking finance companies. Given such a form, they should shed the status of being nidhis.

large nidhi only adds to the regulatorial problem since it enjoys special privileges unlike an NBFC. And if all the regulatory constraints that apply to NBFCs, such as reserve requirements and interest rate ceiling, are made applicable to nidhis to better regulate them, there is no incentive for companies to operate as nidhis and there is no rationale to regulate them separately as nidhis.

Also, allowing a nidhi with a large deposit base to enjoy such a status appears to be an invitation to unscrupulous promoters. Even a Rs 50-crore nidhi appears to be an anachronism. If nidhis operate in a particular locality to mobilise and redirect the savings in that area to needy borrowers in the same locality, their size should be in conformity with their objectives. This issue does not appear to have got the committee's attention. The suggestion of insurance cover for deposits of nidhis also appears to ignore the potential of such system to encourage reckless lending. The risk is all the more higher in the case of a large nidhi. The moral hazard problem involved in such issues appears to have been discounted by the committee.

In the changed economic situation, the case for evolution of nidhis has also undergone significant changes. The inability of the borrowers to access capital from banks on the basis of security is now comparatively much lower than it was earlier. In fact, there does not appear to be any case for allowing nidhis to operate in cities where the penetration of banks and NBFCs has increased significantly. The case for nidhis is now restricted only to interior villages and towns. Unfortunately, a large proportion of them are city-based and concentrated in the southern states. Rather than looking at issues on supervision of nidhis, the need is to reduce the classes of finance companies, which alone can aid effective regulation.