Role of MFIs in Rural and Small-Scale Sector

Priyanka Bajpayee

27 Jan, 2020

Micro Finance companies are the financial institutions that provide financial assistance to the small-scale sector in the form of loans, credit, and savings. With the view to ease the credit system of small-scale sector, the concept of Micro Finance Companies has been introduced. They provide loan to small scale sector as they don’t get a loan from banks easily due to their complex process. Loans are offered by the Micro Finance companies to various small businesses who do not have access to the formal banking channels and who are not eligible for availing loans. Loans are provided at inexpensive rates as instructed by the RBI.

What are the Key Contents of Microfinance Companies?

1. The companies must be registered under the Companies Act 2013.
2. Criteria of Minimum net worth as prescribed by the authority must be fulfilled.
3. A Necessary License must have obtained.
4. The objective of the Microfinance Company should be to finance weaker section of the Society.

What are the Categories of Micro Finance Institutions?

Micro Finance Institutions are categorized as follows-

1. MFIs as Section 8 Company
2. MFIs as NBFC MFI

MFI as Section 8 Company

• Section 8 Companies are the Micro Finance companies working as Not for profit registered and governed under the Companies Act, 2013;
• No requirement of Minimum net worth;
• Source of Finance for the small-scale sector (Individual and Business).

Incorporation process of Section 8 Micro Finance Companies

• Acquire Digital Signature Certificate (DSC);
• Filing of RUN Form for Reservation of Name;
• Filing of incorporation form with requisite documents with the registrar for company;
• Registrar will issue a license in Form INC-16 as well as Certificate of Incorporation with PAN & TAN.

Requisite Documents for Incorporation of Section 8 companies

1. ID and Address proof of Directors and shareholders
2. Passport size photograph of appliacants
3. MOA and AOA

NBFC-MFI

NBFC-MFIs are the companies which perform functions as similar to Banks. Loans are offered by the Micro Finance Companies to various small businesses who do not have access to the formal banking channels and are not eligible for availing loans.

Criteria for NBFC-Micro Finance Institution registration

1. Minimum paid-up capital requirement of Rs 5 crore;
2. 85% of qualifying assets is to be maintained all the time;
3. Proper guidelines to be followed as issued by the RBI;
4. Prior approval of RBI;
5. Company Incorporation either as a Private company or Public company;
6. Opening the Bank Account;
7. Submission of all the incorporation documents to the RBI i.e. COI, MOA, AOA, copy of fixed deposit receipt, Bankers report etc.
8. Further, for Micro finance company registration, an online application is filled with the RBI.
9. Once the application is filed, the company will receive the Reference Number.
10. Submission of the physical copy of documents with the RBI along with the requisite documents.

Physical Copy of Documents required for NBFC-MFI Registration

• Certified copy of Certificate of Incorporation of a company.
• Copy of Memorandum and Articles of Association (MOA & AOA) of the Company
• Board Resolution in relation to the proposed Microfinance company registration
• Banker’s Report
• The report prepared by the auditor which reflects the receipt of the minimum net owned fund (NOF) of the applicant company.
• Details of group/associate/subsidiary/holding companies
• Particulars of investments in other NBFCs
• Documents related to the educational and professional qualifications of all the proposed directors of an applicant company

Steps for Micro Finance Registration

In India, For MFI registration following steps are required to be taken-

1. Company Incorporation

For NBFC-MFI registration, it is required to incorporate a company i.e. either as a Private Company or Public Company.

1. Capital requirement

After company incorporation, the company shall increase the authorized and paid-up share capital up to Rs. 5 Crore. The capital shall be increased in the form of equity Share Capital only.

1. Fixed Deposit

The amount received from the shareholder shall be deposited in a bank account in the form of Fixed Deposit. A certificate of no lien shall be obtained from the bank once the process is done. An application shall be submitted to the RBI along with a certificate.

1. Online Application

For obtaining the CARN (Company Application reference number), an online form shall be filed with the RBI.

1. Physical Submission of Documents

The application in the hard copy along with the necessary documents is filed to the regional office of the Reserve Bank of India. Once, the due diligence is done by the RBI, RBI will issue COR (Commencement of Registration)

Takeaway

The role of Microfinance Institutions is mainly in rural and remote areas with the only objective to help and empower the smaller section of society and small businessman who are not eligible to take a loan from any other platform due to lack of documentation and procedures.