WHAT IS MICRO-FINANCE BUSINESS?
Micro finance business is basically a source of financial services for entrepreneurs and small business lacking access to banking and related services.
FEATURES OF MICRO-FINANCIAL BUSINESS
- Which deals with low amounts of financing to people
- Which has been registered with appropriate agency and obtained necessary licenses and permits
BENEFITS OF MICRO-FINANCIAL BUSINESS
- Provide access to funding
- Encourage self-sufficiency and entrepreneurship
- It offers a better overall loan repayment rate than traditional banking products.
- Strengthen financial condition for some days till situation gets better.
TYPES OF MICRO FINANCE BUSINESS
- Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)
- Payday loan business online
- Peer to Peer (P2p) Lending
- Small Finance Bank
- Nidhi Company
1. Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)
NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:
- loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding 1,00,000 or urban and semi-urban household income not exceeding 1,60,000;
- loan amount does not exceed 50,000 in the first cycle and 1,00,000 in subsequent cycles;
- total indebtedness of the borrower does not exceed 1,00,000;
- tenure of the loan not to be less than 24 months for loan amount in excess of 15,000 with prepayment without penalty;
- loan to be extended without collateral;
- aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
- loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower
2. Payday loan business online:
Payday loans have grown in popularity over the years, mainly as a result of the economic downturn and tightening lending practices by banks and credit unions. Many individuals who previously could get approved for a personal loan or borrow against the equity in their homes have found that they no longer qualify for these types of loans. Payday loans are short-term loans which require no collateral and generally range in amounts from 5000 to 50000. They are meant to be fully repaid within a very short period of time (two weeks). Lenders provide these loans to consumers who are faced with an unexpected financial situation which can’t be put off until the next time they get paid
3. Peer to Peer (P2p) Lending:
P2P lending is a form of crowd-funding used to raise loans which are paid back with interest. It can be defined as the use of an online platform that matches lenders with borrowers in order to provide unsecured loans. The borrower can either be an individual or a legal person requiring a loan. The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower. The borrowers pay an origination fee (either a flat rate fee or as a percentage of the loan amount raised) according to their risk category. The lenders, depending on the terms of the platform, have to pay an administration fee and an additional fee if they choose to use any additional service (e.g. legal advice etc.), which the platform may provide.
4. Small Finance Bank:
The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
Criteria for incorporation of small finance bank
- The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore
- Promoter’s minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent
- Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or of running their businesses for at least a period of five years in order to be eligible to promote Small Finance Banks.
5. Nidhi Company:
“Nidhi” means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit.
BRIEF PROCEDURE REQUIRED TO BE FOLLOWED FOR SET-UP MICRO FINANCE BUSINESS
- The Applicant Company must be incorporated under the new Companies Act 2013, or the earlier Companies Act, 1956.
- The applicant company must have sufficient net worth according to the micro finance business requirement.
- Determine your risk bearing capacity
- Get registered with regulation agency and obtain the necessary permits/license.