MFI as NBFC: How to set up Micro Finance Institutions as NBFC?

Ashish M. Shaji

31 May, 2021

A Micro finance institution can be set up as an NBFC. There are certain requirements that should be met for setting up of the MFIs as NBFC. There are certain documents also that should be filed. In this article, we shall discuss the complete process of setting up of an MFI as NBFC.

What do you mean by Micro Finance and Micro Finance Institutions?

As per NABARD^[1], microfinance means provision of thrift, credit and other financial services and products of small amount to the poor in the rural, semi-urban and urban areas given to the customers to meet their financial needs. The qualification for the same is that transactions value is small and customers are poor.

Whereas a micro finance institution refers to an organization that provides financial services to low-income people and offer loans to their members and many provide insurance, deposit and other services. Therefore the organizations that finance on a large scale are called microfinance institutes. They provide credits and other financial services to the representatives of poor strata of the population.

Documents required for setting up MFI as NBFC

The following list of documents should be filed with the Reserve bank:

• Certified copies of incorporation certificate;
• Certified copies of extract of the main object clause as provided in the MOA;
• Copy of the board resolution specifying that-
  • The company is not carrying on any type of NBFC activity or will not do it unless certificate of registration is obtained;
  • That the company has not accepted any public deposits and if it accepts in future then will seek RBI’s approval;
  • The company has formulated Fair practices code according to the RBI guidelines;
  • The company would be a member of the credit information companies and would be a member of minimum one self-regulatory organization;
  • The company shall adhere to the regulations of pricing of credit, fair practices in lending and non-coercive method of recovery according to the RBI guidelines;
  •  The company has fixed internal exposure limits;
  • The company is not licensed under Section 25 of Companies Act 1956/ section 8 of the Companies Act 2013;
• Copy of the fixed deposit receipts and banker’s certificate of no lien indicating balances in support of NOF;
• In case of companies already in existence, audited balance sheet and profit and loss account with directors and auditor’s report;
• Copy of the certificate of the highest education and professional qualification in respect of directors;
• Copy of the experience certificate, if any, in the financial services sector;
• Banker’s report;
• Roadmap for attaining 85% qualifying assets.

Incorporation of MFI as NBFC

An MFI can be registered as an NBFC in the following way:

• A company should be incorporated under the Companies Act provisions, whether public or private;
• Open a bank account in the name of such company after the incorporation and maintain NOF up to 5 crore rupees in the form of share capital or 2 crore rupees in case of NE states;
•  As MFIs are regulated by the Reserve Bank, the same has to be registered with the RBI after incorporation;
• File the documents mentioned above;
• Submit an application online by downloading it from the official website of the RBI ad fill up the application and submit it with all the required documents for verification and registration process. Once it’s uploaded, a company application reference number shall be provided;
• Submit the hard copy of the application to the regional office of the reserve bank with the Company Application Number and supporting documents;
• The final step involves coordinating with the reserve bank on a timely basis and comply with all instructions. Then the RBI will provide the Certificate of Registration.

It is worth mentioning here that the process provided here is detailed according to the same provided under the RBI Act and its rules that govern the MFIs. Therefore readers must visit the official website or Act to remain updated with all the formalities and information about incorporation of MFIs.

Conclusion

A Micro finance institution can be set up as an NBFC. The requirements provided above should be met for setting up of MFI as NBFC. In case of any query, you should take the assistance of a professional in this regard.

Read our article: Role of MFIs in Rural and Small-Scale Sector