NBFC Vs Micro Financing Institution: Things to Know before Setting Up Finance Company

Non-Banking Financial Company or NBFC refers to a company registered under the Companies Act and regulated by the Reserve Bank of India. The main activities of an NBFC are related to small-time lending that includes giving loans and advances to manufacturers, savings and investment products, credit facility, trading at money market, transfer of money, managing portfolios of stocks, etc. All NBFCs are engaged in leasing, infrastructure finance, hire purchase, venture capital finance, housing finance, etc. NBFCs are generally not allowed to accept repayable deposits but they can accept term deposits. 

What are Microfinance Companies?

Microfinance Company or Institution (MFI) operate at a smaller level compared to NBFCs. It serves the similar motive of NBFCs that is, providing lending services to the underprivileged and impoverished sections of the society that do not have an access to traditional banking facilities. MFI lends small funds to the poor people that vary from Rs. 1000 to 20000 for starting a business. There have been complaints of MFIs regarding irregularities in their functioning as they charge relatively higher interest rates than the NBFCs. Besides, it mainly indulges in giving loans in contravention to the directives issued to such MFI to newly formed groups within 15 days of formation.

How they Differ from NBFCs?

The state governments have taken some steps to convert MFIs into NBFCs to ensure better regulation by RBI. Also, MFIs wants to get NBFC status because they will get access to wide-scale funding from banks. 

Both NBFC and Microfinance Companies play an important role in rural areas. Where there is an absence of banks, the Non-banking financial institution can perform similar functions like a bank. Although, Non-Banking Financial company cannot issue checks drawn on itself it can facilitate term deposits and medium scale lending. 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. Unlike NBFCs, the MFIs are not regulated through any financial institution of the government.

Advantages of Opening an NBFC

• Ensures the smoother flow of credit for small debtors and so acts as an important tool of maintaining accuracy in the market. 
• Catering to a variety of clients in online/offline mode with a relatively smaller size of staff..
• Reduces load on other lenders and hence loan processing time is also reduced leading to an overall increase in efficiency of the lending process. 
• Reduces the risk of lending bad loans as the profile of a customer is analysed by NBFCs before considering them eligibility for the loan.

Getting NBFC License in India

The procedure to get the NBFC license is completed according to the master directions given by the Reserve Bank of India. The NBFC of this category should not have any client interface or a public fund. Let us understand the process of registration in the following section.

Eligibility Criteria for NBFC License and Registration

• The first step to be followed is the registration of the company according to the Companies Act, 2013.
• The company must have some fundamental infrastructure that can support the offering of such services. 
• The company must have an adequate capital structure to seamlessly offer account aggregator services. 
• The general image of the company’s administration should be free or unbiased of public intrigue.  
• A prerequisite amount of Rs. 2 crores are required to apply for getting the certificate of registration from RBI. Without getting the registration certificate the company won’t be allowed to operate as an NBFC. 
• The company should provide information related to its data innovation framework that can provide services of account aggregation. 

It is recommended that new entrepreneurs should reach out to firms specializing in the registration process. These firms have experts who can help the customers to get their NBFC license easily. Hiring an expert will help to compile all the necessary documents, filing the Application correctly, and getting all the verification and paperwork done on time. So, do not wait any more, just hire an expert from any reputed firm and get your NBFC license as soon as possible.