Is Director Salary Allowed at Microfinance Company?

Narendra Kumar

16 Dec, 2020

Microfinance company provides financial support to entrepreneur and small businesses. Micro Finance company is part of Non-Banking Financial Company who provides credit finance to individual and small business. It is also known as Micro Finance Institute (MFI)

There are two categories of business form handled by Micro Finance activities

1. NGOs – Not for profit (e.g. Trust, Society, Section 8 companies)
2. For-Profit (NBFC, MFI)

Minimum net owned funds for incorporating NBFC-MFI (other than section 8 company) is 5 crores. While in the northeastern region of the country, it will be 2 crores.

RBI Approval for Micro Finance Activity

Every finance businesses have to be authorized by Non-Banking Finance Company and governed by RBI. All NBFC has to get registered with RBI and comply with the guidelines. However, there are certain business models which are exempted given by RBI to perform financial activity to certain extent

How Micro Finance Company is Incorporated as NBFC

• Register a Public/Private Limited Company
• Deposit the paid-up capital and obtain share certificate
• Complete the requirement with RBI registration
• Online application for NBFC registration as a Micro Finance Company
• Submit physical copies to the Regional office of RBI

How Micro Finance Company is Incorporated as Section 8

• RBI Approval is not required
• No minimum authorized/ paid up criteria
• Need to take approval from Central Government for license
• Once approved, need to file for incorporation

Can Charge Different Rate of Interest

• MFI can charge a different rate of interest to its customer, but as per limit imposed by Reserve Bank of India (RBI), the variance between the minimum and maximum interest rates should not be more than 4%.
• RBI has also made it mandatory for MFI to display the effective rate of interest being charged.

Point to be Kept in Mind While Taking Loans from MFIs

MFIs are always fair and keep their policy clear to have better transparency with their customers. Customers are not required to keep any security deposit or collateral for getting a loan from MFIs. Following points should be kept in mind while taking loans:

• The rate of interest charged
• Information about the borrower
• Other terms and conditions attached to the loan agreement
• Acknowledgment of all repayments

Remuneration to Director in MFI

The profit earned by the company or any other income received shall be solely utilized for the promotion of the company as per the clause of the memorandum.

A person who at any time, has been a member of the company or to any one person claiming through shall not be given any portion of profits or other income earned by the company.

A person is not entitled to get remuneration or any other benefit in money or money’s worth, except payment made out of pocket, interest on money lent, rent on premises let to the company

However, company in good faith shall make payment to any of its officers or any other person who is not a member in return for their services

A Director shall get remuneration when he is engaged in the profitable organization. But shall not get remuneration when it is a nonprofit organization.