How to Start a Small Finance Company in India?

Narendra Kumar

08 Dec, 2020

The Finance company’s main purpose is to provide loans to individual and commercial customers for several of reasons. India is currently considered the largest emerging market for microfinance institutions (MFIs). Basically, it is the bank for the poor. The target of the microfinance Institution are the poor people who cannot access mainstream banking and financial services. MFIs offer three basic services namely savings, credit and insurance. Setting up an MFI is not a colossal task provided your priorities are clear.

What Microfinance brings to the Table?

Many countries, the poor people pursue the informal channel like moneylenders and pawnbrokers for financial assistance. Generally, these channels have high-interest rates and force the borrower to be indebted forever. Since, the unavailability and limited reach of the traditional banking system, people don’t benefit from the economic development of the country.

The microfinance institutions come to the rescue of the BOP as socio-economic reform. The MFIs promotes small and medium scale businesses and entrepreneurship through various schemes. Usually, MFI’s charge higher interest as compared to the traditional banks but way lower than the loan sharks.

Prerequisites

Before going to set the microfinance unit, it is required to decide the basic fundamental premise i.e. to set MFI as a profit institution or as a non-profit institution.

What is the Goal of MFI?

• To improve the quality of life of the poor by providing access to financial and support services;
• To be a viable financial institution developing sustainable communities;
• To mobilize resources in order to provide financially and support services to the poor, particularly women, for viable productive income generation enterprises enabling them to reduce their poverty;
• To evaluate the supporting factors which help people to move out of poverty faster;
• To create opportunities for self-employment for the underprivileged;
• To train rural poor in simple skills and enable them to utilize the available resources and contribute to employment and income generation in rural areas.

Setting up of Non-Profit Micro Finance Business

Non-profit Microfinance Institution is registered as trusts or societies or Companies under respective acts i.e. the Indian Trust Acts, 1882 or the Societies Registration Act, 1860 or Companies Act, 2013. Microfinance generally termed as Microcredit and can be registered under section 8 of Companies Act, 2013.

Setting up of Profit-Making Micro Finance Institution

There are two ways to register profit making MFI which are register as a non-banking financial company (NBFC) or as a co-operative.

The term “transformation,” or commercialization, of a microfinance institution (MFI), refers to a change in legal status from an unregulated non-profit or non-governmental organization (NGO) into a regulated, for-profit institution.

Regulated, transformed organizations differ from non-profits in that they are held to performance and capital adequacy standards and are supervised by a financial authority, typically the central bank of the country where they are registered. A transformed MFI also attracts equity investors. The equity investors want to ensure that the values of their investments are maintained or enhanced and elect Board members who share a common vision for the new for-profit institution.

The microfinance sector consistently focuses on understanding the needs of the poor and on devising better ways of delivering services in line with their requirements, developing the most efficient and effective mechanisms to deliver finance to the poor. Constant efforts towards automation of operations are steadily improving efficiency. The automated systems have also helped accelerate the growth rate of the microfinance sector.

The Registration Process for Non-Profit Microfinance Business through Section 8 Company

An NGO can be registered as a Company, Trust or Society. A company status is always highly recognized in compare to trust or society, therefore Section 8 Companies have higher credibility amongst Government departments, Donors, and another stakeholder.

If you are interested to start a microfinance business, then you might start with section 8 company. Below are the basic features of registering Micro-finance Company through section 8:

• Exempted from RBI approval, unlike NBFC.
• The easiest and cheapest way to Registration
• Lesser compliances as compared to the NBFC – MFI
• Grant unsecured loan to the small business up to Rs.50,000
• Grant loan for dwelling residence up to Rs.125, 000.
• No ceiling on minimum Fund like 2 cr.
• Obtain license under Section 8 of the Companies Act, 2013.
• Cannot accept Public deposits.
• Comply with RBI guidelines on interest rate and processing charge.
• Shall grant a loan in accordance with the limits as mentioned in Guidelines.

Registration Process

• The first step is to obtain DSC and DIN. Minimum two directors are required to incorporate Section 8.
• Than after apply for the proposed name approval to the ROC.
• After receiving approval, the next step is to apply for Central government license. Under this stage, all other documents need to be prepared, even the income and expenditure account.
• The CG may grant approval on the satisfaction of an application. Next step is to apply for incorporation. The company is issued an incorporation certificate.
• Apply for PAN and TAN, once the company is formed.

The Registration Process for Micro Finance Company as NBFC

• Micro Finance Company is a type of Non-Banking Financial Company (NBFC) which is in a business of microcredit to a special type of borrowers. It is a non-deposit taking NBFC.
• The RBI is the authorized body registered to grant a license of NBFC-MFI subject to compliance with Capital norms.
• Deciding the operation Model:

Most MFIs use groups for intermediary financial transactions. Nevertheless, there is a different way in which you can work with these groups. MFIs are broadly classified into two models: Self Help Groups (SHGs) and the Greens.

• NBFC-MFI shall have 10% of its total assets as loans meeting Qualifying Assets.
• Borrower’s income in the rural area shall be up to Rs.1 lakh and Rs.1, 60,000 in case of Semi-urban areas.
• Loan amount shall be up to Rs.50, 000 in the first cycle and Rs.100, 000 in subsequent cycles.
• Total indebtedness of the borrower does not exceed Rs.100, 000/-.
• NBFC shall have paid up capital of Rs.2 Cr.
• Every NBFC-MFI has to be a member of all Credit Information Companies (CICs).
• NBFC-MFIs shall become members of at least one Self-Regulatory Organisation.
• NBFC & MFI shall have CIBIL membership.

Procedure to Register the Micro Finance Company (MFI)-NBFC

Register a Company:

The first step is to register the Micro Finance Company (MFI) as a Company. The Company can be registered as a private limited company or a public limited company.

Raising Authorised and Paid-up Capital to 2 Crores:

As per the regulation NBFC required to have a net worth of minimum Rs 2 Crore. So, after formation, the authorized and paid-up capital shall be raised to 2 crores.

Deposit Rupees Two Crore in Fixed Deposit and obtain Certificate:

After raising the capital amount, the next step is to deposit the sum of Rs.2 crore in Fixed Deposit and obtain a certificate of no lien from the bank.

Application to RBI for Registration:

The next step is to file an online application with RBI for NBFC registration as a Micro Finance Company. The application shall be accompanied by the required documents. On submission of application, the Company gets a Company Application Reference Number. Which is utilized in further all communications with RBI?

List of documents:

• Certified Copies of Certificate of Registration
• Certified copies of an extract of MOA stating the main object which is relating to the financial business.
• Copy of Board resolution
• A copy of Fixed deposit receipt & bankers certificate of lien indicating balances in support of Net Owned Funds (NOF).
• Bankers Report for Applicant Company, group companies.
• No lien certificate issued by Bank.

Submit the Hard Copy to the Regional Office of Reserve Bank of India (RBI) office

Once the application is filed, a hard copy of the application along with all the necessary documents are to be sent to the regional office of the Reserve Bank of India.

Read our article:Micro Finance Company Registration Procedure in India