Micro Finance Company Registration Procedure in India

Ashish M. Shaji

14 Oct, 2020

In recent years, RBI Norms for Microfinance companies have been simplified for small lending business India. Microfinance has been playing a great role in fulfilling the Gap in the Indian financial Eco-system. In this article, we will discuss the Microfinance Company Registration procedure & option available for microfinance lending business in India.

Significance of Micro Finance Companies in India

In the recent time period, RBI Norms for Microfinance Company Registration procedure has been regulated wisely so that only serious company can enter in this segment. The financial market in India is continuously increasing in its size and structure.

Apart from the conventional borrowing sources such as banks and financial institutions, the NBFCs such as micro-finance companies are gradually holding a strong position in the fiscal system. Micro-finance companies are the organizations established to provide financial services to low-income populations and also offer insurance, deposits, and other services. 

In the global context also, micro-finance companies are engaged in providing micro credit to villagers, micro-entrepreneurs, impoverished women, and poor families. Earlier, the nature of the micro-finance company was that of a Non-Profit Organization (NGOs) working in the unorganized sector. With the development of the financial market, there has been standardization of the micro-finance companies into the profit-making entities. RBI norms for microfinance companies have been simplified in the recent time so that early-stage NBFC company can apply for MFI license.

Microfinance Company Registration Procedure under RBI Act

The registration process for Micro finance Company is as follows:

• Register the business as a company under Companies Act 2013;
• Get certificate of incorporation;
•  Maintain a net owned fund of up to 5 crore rupees after incorporation;
• The registered company should obtain license from RBI to offer financial assistance;
• Once the application is processed, RBI will issue a certificate of Commencement of Business to the new enterprise.

RBI norms for microfinance companies have been outlined in the detailed operation plan for MFI. All of the micro-finance companies should seek registration with the Reserve Bank of India (RBI) on the official website of the RBI along with necessary documents.

However, before that, the entity should be incorporated under the Indian Companies Act, 2013^[1]. Moreover, it should be noted that every micro-finance company should have membership in CIBIL. The application for the micro-finance registration with RBI should be accompanied by the following documents:

• Certificate of Incorporation and Certificate of Commencement of Business, in case of public companies;
• Main objects of the company as stated in its MOA;
• Board Resolution for registering the concerned company as a micro-finance company;
• A banker’s report depicting the company’s dealings in deposits, loans, fixed deposits, Net Owned Funds (NOF) etc;
• An auditor’s report assuring the minimum Net Owned Funds of Rs 500 Lakh (NOF) maintained by the applicant company;
• Certificates of the highest educational and professional qualifications of all the directors of the applicant company.

The RBI, after proper examination of the application and the documents and after conducting due diligence, will issue the Certificate of Commencement of Business of a micro-finance company.

Meaning of Cost of Funds as Stated under Guidelines on “Pricing of Credit”

The RBI provides an inclusive meaning of the “Cost of Funds”. It includes the following items:

• Interest payments
• Monthly amortized processing fee including service tax
• Monthly amortized stamp duty charges
• Monthly amortized Demand Draft charges

All these will be deducted from interest accrued on security deposits.

Limitation on Lending Funds for Personal Use/Emergencies

Out of the total funds borrowed from the micro-finance companies, at least 50 % should be used for income generation and a maximum of 50 % can be used for other purposes; such as housing repairs, education, medical and other emergencies.

Loan Processing Fees of Micro-finance Companies

The processing fees charged by any micro-finance company should not be more than 1% of total amount of funds borrowed. A number of fees received should be booked in the accounting period in which these are paid or received. The amortization of the fees is not permitted.

What is the Cost of the Loan for MFI?

The cost of loan availed from a micro-finance company is bifurcated into three parts:

1. Interest payment;
2. Processing fees;
3. Insurance charges inclusive of administration charges.

Features of Micro-finance Companies

Some of the essential features of MF Companies are as follows:

• It should have minimum net owned fund of 5 crore ;
• At any time the credit provided to a borrower should not exceed 2 lakh rupees;
• The company can demand processing charges from its customers and such charge should not be more than 1% of the total amount.

Conclusion

Earlier the micro-finance companies were entitled to provide loans up to INR 50000 to the population residing in the rural areas and semi-urban areas of the country. Recently, the limit was increased up to 1.25 lakh rupees in rural and semi rural areas and 2 lakh rupees for urban and semi urban areas. The micro-finance companies should charge a reasonable rate of interest for the borrowers as may be governed by the RBI.

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