NBFC

How do you start a microfinance business in India?

The traces of microfinance business in India will let us go back to 1974. The credit goes to the Self-employed Women’s Association (SEWA) established in Gujarat; they were the ones who came up with the idea of including women in the microfinance business in India. Later on, many banks started offering financial services to the people to grow small-scale businesses basically from the rural areas. The major shift in the philosophy of the baking sector came with the economic crisis of the 1980s which led to the fact that the system was commercially feasible.

Although the microfinance sector has vast potential, it faces certain challenges with accessibility, especially for the rural population. It is an essential branch of banking service that is meant for people who can’t avail of any other financial services. The main objective of these companies is to nurture the lifestyle of the unemployed and low-income population. Several institutions offer complete support, including setting up bank accounts, lending facilities, and microinsurance products. There are many developing countries, including India, that serve the financial needs of society through various formal channels. Still, it does not match the demand of the rural need. Therefore, the microfinance business comes into play to develop many small-scale businesses from scratch.

Contrary to the formal banking sector, microfinance businesses provide short-duration loans with lesser amounts. There is no need to follow the lengthy procedure or give collateral security. The main key factors in microfinance schemes are loans that are offered even without any collateral securities. Loan facilities under these schemes are indeed specially offered to those living under the poverty line.

Recent expansion in the microfinance business in India

The microfinance business in India has recorded a growth of 21% in FY 2023 at 3,51,521 Crores INR when compared with the previous year’s data of 2,89,845 Crores INR. If we look at the quarterly report of Sa-Dhan, an association of impact finance institutions, which also includes MFIs (Microfinance Institutions), for the last quarter of FY23, that shows there has been overall growth among all types of microfinance competitors during the year.

 The key developments in the microfinance industry are as follows:

Reforms in policy-making

The factor behind the development of microfinance business in India has been taken as per the policies laid down by the RBI. The Reserve Bank of India has always played a major role in regulating and benefiting the microfinance industry. The RBI has taken major steps to increase the cap on lending through microfinance institutions by providing them with greater flexibility in procuring their interest rates. This decision made the microfinance industry more feasible for MFIs while offering loans at accessible rates for the borrowers.

Credit scoring and Data analysis

Credit scoring and data analysis have helped microfinance institutions evaluate the creditworthiness and risk management of the borrower. This perspective helps financial institutions in decision-making in the process of loans. The utilization of alternative data sources, such as social media activity and mobile phone usage, allows Microfinance businesses in India to rectify borrowers who lack conventional credit history. This creative perspective allows microfinance businesses in India to be used by those who were previously considered very risky to lend.

Inclusion of women in the Microfinance business

Several initiatives have been launched by both the government of India and the private sector to support women through microfinance business in India. SEWA (Self-employed Women Association)^[1] can be called the first major institution to take the initiative for the inclusion of women in their growth in low-scale microfinance businesses in India. In addition to that, many women’s self-help groups have also come up with offering financial support and training to female entrepreneurs throughout the country.

Green Microfinance

It has emerged with an objective of environmental concerns. Microfinance businesses these days encourage environmentally sustainable practices and support businesses that are eco-friendly.

Impact of investing

It has been seen that the impact of investing has been a key focus in recent developments. Investors from every field are very much interested in the microfinance business in India, considering it as a great avenue to generate both social impact and financial returns. It has enabled microfinance institutions to level up their operations and reach out to more underserved communities where banking services are just a dream.

Enhancing customer education

With the development of digital India, nowadays, everyone has access to the web, which allows them to learn new things that were hard in the old times. This is why customer education has been a paramount focus in the recent years of baking. Witnessing that the borrowers understand the terms and responsibilities of their loans is critical. Many microfinance businesses started conducting financial literacy programs and facilitating training to help borrowers manage their finances effectively, minimizing the risk of indebtedness.

Digital financial inclusion

In the year 2024, it has been assumed that digital financial inclusion will be noticed as the appraisal of the growth of digital services offered by microfinance businesses in India. Digital lending, mobile banking, and contactless payment systems will appear as very important tools for expanding services to clients residing in remote areas.

Regulatory Reforms

In recent scenarios, regulatory reforms taken by RBI have played a very significant role in carving the microfinance business in India. Regulatory bodies, as well as the government, have been working hand in hand to create a helpful environment that promotes the growth and sustainability of microfinance institutions. Through these collaborations, the regulatory bodies have been able to set clear guidelines and standards to improve licensing and supervision frameworks and disclosure requirements as well.

List of microfinance companies registered in India

Follows the list of top microfinance businesses in India that are registered:

• Annapurna Microfinance Pvt Ltd
• BSS Microfinance Limited
• Asirvad Microfinance Limited
• Cashpor Micro Credit.
• Bandhan Financial Services Limited
• Equitas Small Finance
• ESAF Microfinance and Investments (P) Ltd
• Fusion Microfinance Pvt Ltd

Mandatory requirement Section 8 of the Companies Act to administer a microfinance business in India

The guidelines laid down by the RBI have always been considered the first for laying down the foundation of any microfinance business in India. It is the regulatory body for financial institutions like microfinance institutions and NBFC. Microfinance business will be operated as per the direction given by the Rbi under section 8 of the Companies Act, 2013. The very first objective of microfinance businesses in India is to facilitate financial support to the weaker section of society, i.e. small-scale businesses, which are generally excluded from formal or traditional banking services. Microfinance businesses are raising contributions as per the conditions of carrying out philanthropic and society-based activities. Hence, these businesses would be focusing more on increasing their income through different kinds of donations.

These compliances are as follows:

Minimum net owned funding (NOF)

As per the RBI guidelines, microfinance businesses must maintain a minimum net-owned fund worth 5 crores INR. This prerequisite makes sure that the registered company processes a rigid foundation, which is vital for sustainable operation.

Board of Directors (BOD)

The constitution of directors is of paramount importance. They should have expertise from various backgrounds like finance, law, and social development. In addition to that, two-thirds of the directors must be independent.

Body governing

The governing body should be responsible for taking care of the company’s operation. It must be a transparent and efficient structure. This will include regular meetings and define the roles and responsibilities of each member of the company.

Social objectives

The primary focus should be on the social objectives designed during the registration process of the company. It includes credit facilities to the economically weaker section of society, self-help groups, and also small businesses.

Interest rates and charges levied

The RBI mandated that microfinance companies must comply with fair interest rates and charges. The rates and charges should be reasonable. Transparency in the pricing is crucial for maintaining trust and worthiness in the market.

Diversification in the portfolios

To reduce the risks, the companies must diversify their loan portfolio. It would ensure that the exposure to a particular section or region is not narrowed, mitigating losses due to inevitable circumstances.

Benefits of starting a microfinance business in India

Many other microfinance institutions also facilitate additional services such as savings, accounts, and even micro-insurance services, business, and financial education. That will promote the social and economic growth of the nation. Some of the benefits of registering a microfinance company are as follows:

Facilitating immediate funds

The microfinance business in India helps to provide an additional level of support to recovery in the economy at large. It allows businesses to run their company efficiently and upscale their companies at the same time. It furnishes the opportunity for the firm to get immediate resources for keeping their business up, resulting in the accumulation of funds and providing more accessibility for funding their business.

Credit Accessibility

 It can be seen that the amount of money borrowed by the economically weaker section as loans is less, and the big banks don’t provide any credit facilities to them. However, microfinance companies are always there to help them as their basic ideology is to provide a small credit amount, which would be a great step in diminishing the poverty level. Women usually cannot obtain the documents for identification, certificates, or house ownership, thereby obstructing their access to financial institutions.

Cheaper rates for loan repayment

Data shows that women are very likely less likely to default on repayment of loans, so the microfinance business in India usually targets female borrowers. They are considered safer investment options for lenders and also help empower women. Statistics show that 55% of women have the honesty trait and integrity while compared with the men, who are 55%, respectively. So, the repayment rate is around 98% at a given period.

Opportunity for educating the children

Suppose the children of economically weaker families have not been enrolled or admitted in any of the schools, as these families are mostly agricultural backgrounds. So, these institutions help them receive education by providing them funds to meet their financial requirements, allowing children to complete their education.

Creation of job opportunities

It allows entrepreneurs to borrow credit from microfinance businesses in India to start their businesses. There is an increase in employment benefits for the local economy as more money circulates through local businesses and services.

Future Prospects of investment increase

The perpetual cycle of poverty has created a gap, and to minimize the gap, make more money available. Availability of funds means the basic needs are met. So, the investments can fulfil their basic family needs like sanitation, education of the children, health care facilities, etc. All of these will add up to the possibility of future investment as the people could now match their necessities.

Influencing economic gains

Here, it is seen that overall economic gains are not monetary but are from stability. So, at the core level, microfinance businesses in India always have a positive effect. It can be seen as a very important financial tool to curb the cycle of poverty.

Steps involved in starting microfinance businesses in India

The following processes are involved in the registration of microfinance business:

Registration of the company

The very first criteria to register a microfinance business as a company under the Companies Act of 2013. The initial registration of the company makes it eligible for the name of a public limited or private limited company. The capital required is 1.25 Lakh INR.

Simplified Proforma for Incorporating Company Electronically Plus (SPICe Plus Service)

The above-mentioned service can be carried out by the applicant as the whole registration process is online. The service would provide the following details: Name reservation, DIN, PAN, TAN, EPFO, Bank account, and other forms of registering a microfinance business.

Checking the company naming

If the naming of the company is present in the public domain, then the applicant has to click on the auto-check option to fulfil the requirements related to the name of the company. Both the Part A and Part B must be submitted.

Capital Raising

The next step would be for the microfinance business to raise the amount of 5 Crore INR as per the requirements.

Opening of a bank account

The next step involved would be opening a bank account. A certificate entailing no lien created would be required for the above process. The application has to be presented before the RBI in the form of a certificate.

Application

Furthermore, the applicant has to make an online registration with the RBI for the registration process of the microfinance business in India. By submitting it, the applicant would receive the ‘Company Application Reference No. ‘

Submission of the hard copies

After this whole process, the applicant has to submit the hard copies to the regional office of RBI within the applicant’s jurisdiction. The RBI would now look into and verify with due diligence and scrutinize to confirm the requirements.

Documents useful for obtaining registration of the microfinance business in India

The following are the documents required for the microfinance registration are the following:

• A copy of the certificate of incorporation of the registered company
• PAN (Permanent Account Number) card details of the applicant company
• PAN card details of the directors
• DIN (Director identification number) of all the directors
• DIN (Director Signatures Certificate) for all the directors
• Latest passport-size photos of all the directors
• Address proof of the registered address of the microfinance company that has been registering
• Copy of the lease deed or the rental agreement
• A certified copy of MOA (Memorandum of Association)
• A certified copy of AOA (Articles of Association)
• A copy of the certified banker’s report
• NOC (No objection certificate) from the company
• The net worth of all the certified directors

Conclusion

Nowadays, the demand for microfinance businesses in India continues to increase rapidly among the Indian population. Starting a microfinance business institution can take an hour. It cannot be denied that documentation is the major of any registration process. Also, the availability of automated systems leads to the growth of the microfinance sector. This sector focuses mainly on the weaker section of society and plays a proactive role in delivering services in line with the requirements. It would help in reaching the sustainable goals for the economic development of the country.

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