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How to Establish an MFI in India?

Shailza Sharma

| Updated: Aug 20, 2019 | Category: Micro Finance Company

MFI in India

Microfinance companies are also known as micro-lender or micro- creditors. Mainly conventional banks provide loans to entrepreneurs and to small businesses, but when entrepreneurs unable to match the loan criteria of banks microfinance companies provide financial credit to them. It’s the main practice of microfinance lender’s to provide a small sum of money to those who want to start a small business. MFI in India can be registered as a section 8 company or it can also be registered as NBFC (Non-Banking Financial Company).

Introduction on MFI in India

Microfinance Company is a source of financial services for entrepreneurs and small businesses, a type of NBFC which is in a business of micro credit finance to individual and small business. It is also known as Micro Finance Institution (MFI).

Generally, these finance companies also provide loan up to Rs. 50,000 primarily where other banking facilities are not accessible.

There are two types of business models doing business in micro -finance activities:

  1. NBFC-MFI
  2. NGO’S, Trust, Society, and Section 8 company

Why Start MFI in India?

Any investor or entrepreneur who is interested in owning a bank, but due to difficult capitalization norms, is unable to meet the requirement for obtaining bank license, can set up a micro finance company. The requirement of starting a micro finance company is too less than a standard bank. This business is an excellent option for those who understand the power of lending money. A person can lend money to a person when they need most without doing any charity.

Starting micro finance can be risky too, but if proper diligence is processed before investing or lending money, likely no loss can occur. After proper market research and checking the existing competition, weaknesses and strengths of the market can be carried out. By which mistakes can be avoided and one can establish much-preferred micro finance company.

Mode of MFI Registration 

In case of Section 8 Company and NBFC, below mentioned capital is required:

  1. Section 8 Company – No minimum capital
  2. NBFC – Minimum 5 Crore

MFI Registration through Section 8 Company

An NGO can be registered in the form of Trust, Society, or Section 8 company of the companies Act, 2013. Companies registered under section 8 are governed by the Ministry of Corporate Affairs, subsequently; trust and societies are governed by state govt. acts and regulations.

For Section 8 Company Registration, following are the basic requirements:

  1. Minimum two persons are required
  2. Documents Required –
    1. Latest two passport size photographs of Director/Promoters
    2. PAN card copy of all Director/Promoters
    3. Voter ID/Adhaar card /passport for an identity passport
    4. Bank statement, electricity bill/water bill for address proof, but should not be older than 2 months
    5. Ownership Documents of Registered office
    6. Rent /lease agreement
    7. Electricity Bill (Not more than 2 months old)

The Section 8 Company registration process is as follows:

Apply for Digital Signature Certificate

A digital certificate is a secure digital key that is issued by the certifying authorities for the purpose of validating and certifying the identity of the person holding this certificate.  Digital signature makes use of the public key encryption to create the signature. eMudra is one of the certified authority  which issue the digital signature certificate.

National Informatics centre, Code Solutions, safescrypt, and Indian Institute of development and Research in banking technology are other certifying authorities.

Request for Name Approval

For name approval, the application for name availability of section 8 companies has to be made in Reserve Unique Name (RUN) Facility.  A company whose name is approved as per the rule of RUN is valid for 20 days from the date of name approval and 60 days from the date of approval in case existing company changing its name. The name in this field shall end up with Sanstha, foundation etc.

File SPICe Form

  • In respect to simplify the process of incorporating Section 8 section companies on 7th June, 2019 requirement of  prior filling of INC-12 has been dispensed vide the Companies (Incorporation) Sixth Amendment Rules, 2019.
  • Henceforth, Section 8 can be incorporate by either reserving its name through Run or then filling SPICe or by directly filling SPICe and license no. shall be allotted at the time of incorporation.
  • In context to above, all pending INC-12 for new companies pending in respect of RoCs would be rejected on 15th August, 2019. Such applicant may thereafter directly file SPICe for obtaining License number for the incorporation of Section 8 Companies.
  • Additionally, forms for MoA and AoA will be available for download by the name of SPICe MoA and AoA.

Issuance of Certificate of Incorporation

Registrar of Companies will issue a unique CIN along with the certificate of Incorporation.

Allotment of TAN and PAN

Hence, after the formation of company PAN and TAN will be allotted to the company, the copy of both will be posted to the registered office of the company.

Section 45I (a) of RBI act provides a license to start a Micro Finance company.

Also Read: Simplification of the Process of Incorporation of Section 8 Companies

MFI Registration through NBFC-MFI

Main Requirements for MFI registration with RBI

Should have a minimum owned fund of Rs. 5 Crore.

Steps involved in the process of MFI registration:

Company Registration

The first step is to register the micro finance company as Private Ltd. Or Public ltd.

Raise Capital

The second step is to raise both share capital and authorized share capital up to the required amount i.e INR 5 crore.

Fixed Amount

Next requirement is to open a new account and to deposit the amount of INR 5 crore in the fixed deposit. The bank will provide the ‘no lien’ certificate, which needs to be deposit with application to RBI is filed.

Required Documents

An online application is available on the RBI website, the documents required to fill the application is

  • Certified copies of Certificate of registration. 
  • Certified copies of MOA relating to financial business.
  • Board resolution declaring the company shall follow all the rules and regulation notified by the RBI.
  • Lien Certification issued by the bank after fixed deposit
  • Director’s highest qualification certificates.
  • Bankers report of applicant companies.

Online Application

The online application is available on the RBI website. Download the application required for NBFC. After filling the application upload the same on the website.

 The company be would be issued Company Application Reference Number (CARN) after the successful upload of application.

Submit the hard copies to Regional Office of RBI

The hard copy of application indicating the CARN along with the supporting documents needs to be submitted to the concerned regional office by the applicant company.

Who are eligible for a loan from Micro Finance Company?

  • An individual whose total annual income is not exceeding INR 1, 00,000 in a rural area or INR 1, 60, 000 in an urban and semi-urban area, can take loan up to INR 1, 00, 000.
  • In the first cycle, the only loan amount will not exceed INR 60,000 and INR 1, 00,000 in the subsequent cycle.
  • Tenure of the loan will not be less than 24 months for the repayment of loan amount INR 30,000.
  •  Loan to be extended without collateral.

Also Read: NBFC Regulatory Requirements

Difference between Section 8 Company & NBFC-MFI

Conclusion

MFI in India plays a vital role in a rural area, where an individual requires a very small amount of loan for setting up a business on very small scale. Starting a section 8 company is a low-cost process with less compliance and even no minimum capital is required.  Where banks have strict norms and rules while these MFIs India with simple rules is a life savior for those who cannot fulfill the loan criteria of banks. 

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Shailza Sharma

Miss Shailza Sharma, BA.LLB graduate from Himachal Pradesh University. She holds an experience of 2.5 years in various Legal companies and organizations.

Business Plan Consultant


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