Register your Microfinance Company!
If you want to get this registration so that you can do more for the community, to reduce poverty, promote financial inclusion, and empower individuals by providing access to financial and capital tools. then you should get in touch with DisyTax.
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Microfinance Company Registration
Microfinance companies, as the name suggests, are financial institutions that provide finances to low-income groups, where the finance requirement is lesser as compared to other sectors of the society. These sectors generally do not have access to traditional financial institutions such as banks and other financial institutions.
Need for Microfinance Companies
In India, there are many institutions like banks that grant loans to finance businesses. So why do we need microfinance companies? The need arises as it serves the following purposes:
- It provides financial assistance to enterprises that cannot place collateral
- It encourages women entrepreneurship
- It provides startups with much-needed support
- It offers assistance even for nominal amounts which generally are funded as hand loans
- It formalizes the process of lending and hence brings about discipline in borrowing by low-income groups. This prevents over-borrowing and reduces complications arising out of high future debts.
Formation of Microfinance Companies
Ideally, only a Non-Banking Finance Company (NBFC) is authorized by the Reserve Bank of India to conduct financial business. However, certain exemptions are provided by RBI to particular businesses to perform financial activities up to a specified limit.
Therefore, a microfinance company registration can happen in the following two ways:
- Non-Banking Finance Companies (NBFC) duly registered with RBI
- Section 8 companies (companies formed under Section 8 of the Companies Act 2013)
Prerequisites for Microfinance Company Registration
To register as a microfinance company either through an NBFC or Section 8 company, some prerequisites must be met. The requirements are as detailed below:-
| Prerequisites | NBFC | Section 8 Company |
| � | � | � |
| Approval of RBI | Mandatory | Not Required |
| Net owned funds | Minimum 5 crores | No minimum requirement |
| Limit on loans | Maximum of 10% of total assets | Unsecured loan of Rs 50,000 to small business Loan up to Rs1.25 lakh to dwelling residence |
| Complexity of Microfinance Company Registration | All processes involved in forming a company have to be performed. | Relatively simple as it is registered as a non-profit organization |
| Adhering to Compliances | It has to adhere to all compliances of an NBFC. | Adhere to compliance of RBI, but they are less stringent in comparison to NBFC |
| No of members | For a private limited company minimum of 2 For a public limited company minimum of 7 | Minimum of 2 members |
| Status of organization | Profit organization | Non-profitable organization |
Microfinance Company Registration as an NBFC
Given the differences in the two models for forming a microfinance company, the registration process also varies considerably. The following are the steps involved in the registration of a microfinance company through an NBFC:
- Register a company: To be registered as an NBFC microfinance company, the first step is to form a private or a public company. To form a private company, at least 2 members and a capital of Rs 1 lakh is required. To form a public company, at least 7 members are required.
- Raise capital: The subsequent step is to raise the required minimum net owned funds of Rs 5 crore. For the northeastern region the requirement is of Rs 2 crore.
- Deposit the capital: On collection of capital, the next step is to deposit the capital in a bank as a fixed deposit and obtain a ‘No lien’ certificate for the same.
- Apply for license: Finally, the NBFC must fill an online application for the license and submit it along with all the certified documents. A hard copy of the application and license must also be submitted at the regional office of Reserve Bank of India. The documents that must be available with the NBFC at the time of filing are:
- Memorandum of Association and Articles of Association
- Incorporation certificate of the company
- Board resolution copy
- Copy of Auditor’s report of receipt of fixed deposit receipt
- Banker’s Certificate of No Lien stating the net owned fund
- Banker’s report about the company
- Recent credit report of the directors
- Net worth certificate of the directors
- Education/professional qualification proof of the director
- KYC and income proof of the director
- Proof of work experience in the financial sector
- Structure plan of the organization
Microfinance Company Registration as a Section 8 Company
The other option is to register a company as a Section 8 company. The procedure to be followed for the same is as follows:
- Apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN): To form a company, the first process is to apply for a DSC and DIN. The DSC is essential for authorizing the e-forms.
- Apply for name approval: The next step is to apply for name approval in Form INC-1. The name must suggest that it is registered as a Section 8 company. So it must have the words sanstha, foundation or micro credit.
- File Memorandum of Association (MOA) and Articles of Association (AOA): Post the name approval; the company must draft the MOA and AOA and file it along with necessary documents.
- File all relevant documents: The last step is to file all relevant documents along with the incorporation certificate, and Form INC -12 to obtain a license. The primary basic documents required for registering a company under both the models are:
- PAN Card copy of all directors/promoters
- Documents for identity proof
- Documents for address proof
- Photograph of all directors/promoters
- Proof of ownership of registered office or rental agreement for the same
- NOC from the owner
- Applicable stamp duty as mandated by the state
- Any other documents as required
As it’s evident, registering a microfinance company as a Section 8 company is relatively easier; however, the lending capacity is also limited. Hence an institution must take into consideration all the facts and make a wise decision.
Frequently Asked Questions (FAQs)
- What are the rules of microfinance?
Tenure of the loan is not less than 24 months when loan amount exceeds 15000 with right to borrower prepayment without penalty
Loan is repayable by weekly, fortnightly or monthly installments at the choice of borrower. Income generating Loan: Not less than 70% of total loan outstanding. etc.
- What are the 5 C’s of microfinance?
The 5 Cs of Credit analysis are – Character, Capacity, Capital, Collateral, and Conditions. They are used by lenders to evaluate a borrower’s creditworthiness and include factors such as the borrower’s reputation, income, assets, collateral, and the economic conditions impacting repayment.
- What is the microfinance limit?
The RBI defines a microfinance loan as a collateral-free loan given to a household having annual household income up to ₹3 lakh.
- Who controls MFI?
The Reserve Bank of India (RBI) shall regulate the micro finance sector; it may set an upper limit on the lending rate and margins of Micro Finance Institutions (MFIs).
- What is the main aim of microfinance?
The goal of microfinance is to ultimately allow impoverished people to become self-sufficient.
- Where can I obtain the interest rate levied by an NBFC/MFI?
According to the RBI, all MFIs are required to disclose interest rates on their official website and in their offices.
- What is a microfinance example?
Microfinance comprises, among other things, microcredit, which is the provision of small loans to low-income clients, savings and checking accounts, microinsurance, and payment systems.
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