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Thursday, May 11, 2006


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Pursuit of prudence

R. Anand

Nidhi companies need prudential norms


Nidhis are here to stay and will continue to perform a useful role. However, they will have to integrate accounting and related issues with the mainstream players in the financial system.

Nidhi companies have for more than a century played a useful role in providing funds to the needy sections of society. The nidhi business is concentrated mainly in the South, especially Tamil Nadu and Kerala. Nidhis help promote savings and essentially operate on the principle of mutuality. Like other players in the financial system, nidhi companies went through turbulent times in the 1990s, much of which can be attributable to misapplication of funds collected from retail depositors.

The Department of Company Affairs (DCA), the regulator for nidhi companies as well, took necessary action, issuing various notifications from time to time, particularly in 2001 and 2002. There can be no two opinions about the need for tight accounting regulation for ensuring discipline in financial reporting. Strict prudential norms have helped ensure better transparency in banks and non-banking finance companies (NBFCs), reflecting, among other things, the actual quality of assets on the balance-sheet. The Central Government, through a notification dated April 30, 2002, instructed nidhi companies to follow the said norms. But nidhis sought more time for compliance. The Government, then, by an order issued on June 3, 2005, constituted an expert group to re-examine the regulatory mechanism of nidhi companies and suggest remedial measure.

The recommendations

There has to be a commitment to implementing the prudential norms in totality, by way of disclosure in the notes on accounts, for the year-ended March 31, 2006. This is to find out whether nidhi companies intend to fall in line or not.

The extent and manner of compliance can be achieved in phases to alleviate any hardship arising out of a one-time charge in the accounts.

The provision for income reversal and that for non-performing assets are to be made on the following basis:

For year ended March 31, 2006 — 50 per cent of pre-tax as per published accounts.

March 31, 2007 — 50 per cent of pre-tax as per published accounts.

And for years ending March 31 of 2008, 2009, 2010 and 2011 — un-provided balance on an equal basis over the balance four years

Further, the accounts for year ended March 31, 2006, should clearly indicate by way of notes on accounts the total provision to be made as per the existing Notification. Similarly, the balance amount to be provided in the succeeding years should be indicated in the accounts of the succeeding years. By this process, the Group feels that a) transparency is ensured in the matter of disclosure of recoverables and related compliance; b) the load of the provision is staggered over six years; c) the load in the first two years is intertwined with the availability of profits; and d) during 2006 and 2007, nidhi companies will be put to notice that they would have to reorient their business models to either collect the outstandings or make good the un-provided amounts in the next four years.

Reform needed

Needless to mention, companies keen on implementing the provisions in a shorter period can do so. For all jewel and mortgage loans disbursed after March 31, 2002, the existing provisions of the Notification will apply.

The Government has informed nidhi companies that the recommendations of the study group on the issue of prudential norms have been accepted.

There is no gainsaying the need for reforms. The quality of assets on the balance-sheet should be reflected correctly to gain the confidence of and credibility amongst depositors and investors. The business of nidhis is here to stay and will continue to perform its useful role in the overall financial system. Somewhere along the line, nidhis will have to integrate accounting and related issues with mainstream players in the financial system. The introduction and implementation of prudential norms is necessary to achieve the aforesaid objective.

(The author is a Chennai-based chartered accountant.)

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