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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.
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.
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.
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.
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.
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:
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.
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.
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.
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.
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?
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.
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