A Complete Guide To Set-up Micro Finance Institutions As NBFC

Micro finance institutions or MFI can be established as NBFC by following simple process To set up an NBFC from MFI, certain requirements must be fulfilled by following a prescribed procedure provided by the Reserve Bank of India. Through this article, we will enlighten you with the facts and requirements, a complete guide to set up Micro Finance as a non-banking finance company.

What Is Microfinance Institution (MFI)

NABARD described microfinance institutions that facilitate thrift, credit, and other financial solutions and products of small amounts to the economically weak section of the rural, semi-urban and urban areas provided to the consumers to satisfy their financial requirements. The basic requirement for their services includes small transactions value and customers must come from weak economic backgrounds.

Beneficiaries of Micro Finance Business are a wide range of consumers who enjoy financial services are low-income groups and small and medium enterprises also offer insurance, deposit, and other services. These organizations that provide financing solutions on a large scale are called microfinance institutes. Micro financial businesses allow their consumers to take loans at low-interest rates with additional benefits.

A large number of microfinancing businesses are operated in developing nations such as India, Bangladesh, Nigeria, Uganda, Indonesia, Serbia, and Honduras, and many more.

MFI indulges in ethical lending practices and offers attractive repayment plans, large rural population is getting benefits from them. As per the World Bank report, more than 500 million people have been benefited from micro finance businesses running across the globe.

What Are The Main Features of Micro Finance Company

• The loan must be offered to borrowers from Low Income Groups
• They offer Collateral free loans with no pre installment charges
• The shorter repayment tenure for loans
• Minimum NOF (Net owned funds) must be Rs. 5 crores or more if registering as an NBFC
• It is not necessary to be a member of any of the Self-Regulatory Organization (SRO) such as RBI, SEBI, NABARD, SIDBI or IRDA
• There should be a difference of 4% of the interest rate charged by MFI
• It is necessary for MFIs to be a member of Credit Information Companies (CIC)
• MFIs must demand processing service charge from the customers not more than 1% of the total loan amount

What is NBFC MFI?

The NBFC –  Micro Finance Institution (NBFC-MFI) is known to be a non-deposit accepting financial company with not less than 85% of its assets in the terms of qualifying assets* which must determine the following provided conditions. There are some Micro financial business who qualifies specific criterion and are non-deposit accepting entities, come under RBI wings for NBFC Regulation and supervision.

The “Last Mile Financiers” are known to be an NBFC MFI. The aim of covering them under RBI regulations was to make these NBFC MFIs healthy, secure, and accountable. They have to get NBFC License (Micro Finance Company Registration) with RBI and fulfil the conditions imposed for the same.

NBFC MFI is rigidly a non-deposit accepting non-banking finance company (excepted company licensed under u/s 25 of the Indian Companies Act, 1956) that maintains the following listed conditions:

• Minimum Net Owned Funds (NOF) of Rs.5 crore rupees (as previously mentioned)
• They must have at least  85% of their Total Net Assets (TNA) as “Qualifying Assets.”

*The Qualifying Assets have a substantial period of time to be ready for the purposive use or sale.

The non banking finance company that is not capable to qualify as an NBFC MFI, cannot extend loans to the micro-finance sector, which have a total or greater than 10% of its total assets.

The only distinction between an NBFC MFI meaning and NBFC meaning is that they can only deal at a higher level however MFIs cater considerably at a smaller level of social strata, with the need for smaller amounts of financial services.

List of documents required for registering MFI as NBFC?

The applicant must submit a list of documents with the Reserve bank of India

1. Incorporation Certificate (certified copies)
2. Certified copies of the main extracted  object clause which is provided in the MOA
3. Board resolution copies stating the below-listed points:
   1. A certificate stating- the company is not carrying on any kind of non banking finance company activity or shall not indulge in it unless a registration certificate is obtained;
   2. Stating that the company has not received any sort of public deposits and if they accept in future then they will collect approval from the Reserve Bank of India;
   3. A company has devised Fair practices code as per the RBI guidelines;
   4. A company authorized to be a member of the credit information companies and would become a member of at least one self-regulatory organization;
   5. A company shall oblige to the regulations of the pricing of the credit, fair practices in lending, and non-coercive approach of recovery as per the RBI guidelines;
   6.  A company has pre-determined  internal exposure limits;
   7. A company is not licensed under these sections: Section 25 of Companies Act 1956 and section 8 of the Companies Act 2013;
4. A company must provide a copy of the fixed deposit receipts 
5. A company must provide a banker’s certificate of no lien indicating balances in support of NOF;
6. For already existing companies, audited balance sheet and profit and loss account with directors and auditor’s report must be required;
7. Copies of the certificate of their highest education and professional qualification of directors;
8. Experience certificate, if any, in the financial services or related sector;
9. Banker’s report of a company;
10.  A Roadmap for procuring 85% qualifying assets.

How to Incorporate MFI as NBFC?

Register an MFI as an NBFC by following these easy and fastest steps with MUDS

• A company should be registered under the Companies Act provisions, whether it is public or private;
• Open a company’s bank account after the incorporation and keep NOF up to the limit of 5 crore rupees in the form of share capital and 2 crore rupees in the condition of NE states;
•  The MFIs are regulated under the Reserve Bank of India, so the same has to be registered with the RBI followed by incorporation;
• File all the documents mentioned above;
• Online Application Submission:

• Open the RBI website, click on Download the NBFC Registration application form

• Attest all the required documents necessary for the verification process and fill up the form

• Upload it, a company application reference number will be generated

• The hard copy of the application form should be submitted at the Reserve Bank with the attested company application number and supporting documents. 
• Lastly, coordinate with the reserve bank to get application updates timely and comply with all instructions. After all the required procedures RBI will generate the Certificate of Registration.

It is important to mention here that the procedure provided above is detailed as per the same provided under the RBI Act and its rules and regulations that govern the MFIs. Therefore, you must visit the official website of RBI or Act to remain updated with all the necessary formalities and data regarding the incorporation of MFIs.

Let us discuss some NBFC post-registration conditions,

Every new NBFC-MFIs must keep a capital adequacy ratio or CAR (including Tier-I and Tier-II capital) which should not be less than 15% of its aggregate risk-weighted assets. Combining the total Tier-II capital, at any time, must not overshoot 100% of Tier-I Capital.

*Tier-I: It is the capital that could captivate the losses without the entity being required to halt the trading,

*Tier-2: It is the capital that could captivate losses during the winding–up and so the depositor could not be totally secured.

SRO or self regulatory organizations have a significant role in monitoring the functions and activities of MFIs NFBCs. The industrial associations (in this case SROs) are anticipated to facilitate compliance by the NBFCs which are involved in microfinance (NBFC-MFIs) with the laws and policies and perform in the interest of the consumers of the NBFC-MFIs. 

Conclusion

In this article, we have provided detailed information regarding setting up a Micro Finance Business as NBFC. A Micro finance institution can be easily set up as an NBFC adhering to RBI guidelines. NBFC registration is a quick hassle-free process, just prepare all verified documents and get ready to register your company as NBFC. Under any circumstances, you can take professional assistance and guidance for a smooth process. For the north eastern states, the minimum NOF is to be kept at Rs. 2 crores rupees.

NBFCs and Micro Finance business are assets to our economy. NBFCs do play a crucial part by contributing to the development of an economy by supporting a fillip to transportation, employment generation, wealth creation, bank credit in rural regions and significantly they work with the aim to uplift the rural communities of under-developed and developing regions. Most MFIs and NBFCs have an objective to provide necessary facilities to rural communities at low rates. 

The Reserve Bank has provided all the details on their website regarding NBFC registration, MFIs NBFC registration, and regulatory guidelines. The RBI has simplified the process to promote the MFIs to work efficiently.