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Setting up Micro-Finance Business
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What is Microfinance Companies?
Microfinance Company or Institution (MFI) exists at a smaller level in comparison to NBFC. It is serving the similar motive as NBFC to the underprivileged and impoverished sections of the society that do not have an access to banking facilities. MFI provides small funds that can vary from Rs. 1000-20000 to the poor people for starting a business. There are also some complaints of MFIs regarding irregularities in the functioning as it charges higher interest rates from the poor. Besides, it mainly indulges in providing loans in contravention to the directives issued to such MFI to newly formed groups within 15 days of formation. In some instances, it has been noted that when MFIs get the sanction of credit facility after this there is no review of the functioning of MFI.
The state government has taken some necessary steps to convert MFI into NBFC which are better regulated by RBI. Rather MFIs wants to get NBFC status because they will get access to wide-scale funding from banks.
Difference between NBFC and Microfinance Companies
Both NBFC and Microfinance Companies play an important role in rural areas. When there is an absence of banks in the rural areas then Non-banking financial institution performs similar functions as banks perform. Although, Non-Banking Financial company cannot issue checks drawn on itself. On the other hand, MFI stands for Microfinance institutions which are established to operate at a smaller level than NBFC and provide small loans facilities to the underprivileged sections of the society.
Microfinance companies, as the name suggests, are financial institutions that provide finances to low-income groups, where the finance requirement is lesser as compared to other sectors of the society. These sectors generally do not have access to traditional financial institutions such as banks and other financial institutions.
Need for Microfinance Companies
In India, there are many institutions like banks that grant loans to finance businesses. So why do we need microfinance companies? The need arises as it serves the following purposes:
- It provides financial assistance to enterprises that cannot place collateral
- It encourages women entrepreneurship
- It provides startups with much-needed support
- It offers assistance even for nominal amounts which generally are funded as hand loans
- It formalizes the process of lending and hence brings about discipline in borrowing by low-income groups. This prevents over-borrowing and reduces complications arising out of high future debts.
Formation of Microfinance Companies
Ideally, only a Non-Banking Finance Company (NBFC) is authorized by the Reserve Bank of India to conduct financial business. However, certain exemptions are provided by RBI to particular businesses to perform financial activities up to a specified limit.
Therefore, a microfinance company registration can happen in the following two ways:
- Non-Banking Finance Companies (NBFC) duly registered with RBI
- Non-Banking Finance Companies (NBFC) duly registered with RBI
Prerequisites for Microfinance Company Registration
To register as a microfinance company either through an NBFC or Section 8 company, some prerequisites must be met. The requirements are as detailed below:
Microfinance Company Registration as an NBFC
Given the differences in the two models for forming a microfinance company, the registration process also varies considerably. The following are the steps involved in the registration of a microfinance company through an NBFC:
- Register a company: To be registered as an NBFC microfinance company, the first step is to form a private or a public company. To form a private company, at least 2 members and a capital of Rs 1 lakh is required. To form a public company, at least 7 members are required.
- Raise capital: The subsequent step is to raise the required minimum net owned funds of Rs 5 crore. For the northeastern region the requirement is of Rs 2 crore.
- Deposit the capital: On collection of capital, the next step is to deposit the capital in a bank as a fixed deposit and obtain a ‘No lien’ certificate for the same.
- Apply for license: Finally, the NBFC must fill an online application for the license and submit it along with all the certified documents. A hard copy of the application and license must also be submitted at the regional office of Reserve Bank of India. The documents that must be available with the NBFC at the time of filing are:
Microfinance Company Registration as a Section 8 Company
The other option is to register a company as a Section 8 company. The procedure to be followed for the same is as follows:
- Apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN): To form a company, the first process is to apply for a DSC and DIN. The DSC is essential for authorizing the e-forms.
- Apply for name approval: The next step is to apply for name approval in Form INC-1. The name must suggest that it is registered as a Section 8 company. So it must have the words sanstha, foundation or micro credit.
- File Memorandum of Association (MOA) and Articles of Association (AOA): Post the name approval; the company must draft the MOA and AOA and file it along with necessary documents.
- File all relevant documents: The last step is to file all relevant documents along with the incorporation certificate, and Form INC -12 to obtain a license. The primary basic documents required for registering a company under both the models are:
As it’s evident, registering a microfinance company as a Section 8 company is relatively easier; however, the lending capacity is also limited. Hence an institution must take into consideration all the facts and make a wise decision.
