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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:

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:

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:

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:
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.