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.

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The government of India is working with full earnestness towards a major policy objective shift to achieve financial inclusivity. To fulfill this dream, the Microfinance Institutions have taken center stage as they extend financial services to people of low-income strata working tirelessly to find a way out of poverty.

Microfinance refers to an array of financial services, including loans, savings, and insurance, available to poor entrepreneurs and small business owners who have no collateral and wouldn’t otherwise qualify for a standard bank loan. More often, small loans are given to those living in developing countries and working in small businesses of different trades like carpentry, fishing, transportation, etc.

India is a growing economy with a large population. Government banks and private sector banks cannot open their branches in every village. Though Indian banks have increased their presence but still they have limited reach in remote areas. Micro Finance Company Registration allows these financial institutions to work in remote areas and empower farmers or small businesses in the villages.

Basic Features of a Micro-Financing Institution

With micro finance company registration, a small finance institution can be introduced in a rural or remote area with an objective to assist the unbanked and under-banked sections of the Indian population. Over the years, microfinancing has emerged as a unique economic development tool that has helped crores of underprivileged people.

Following are the key features of Micro-Finance Institutions:

• Deals in low amounts to finance small loans requirement of people.
• Must have a minimum net worth as prescribed by the Regulator.
• Must be incorporated under the new Companies Act 2013, or the earlier Companies Act, 1956.
• Has been registered with an appropriate agency and obtained necessary licenses/ permits.

Benefits of Micro-financial Business

The distinctive features of the micro-finance lending management solution allow lenders to have access to this huge untapped sector of the Indian economy without the need for manual intervention, excessive paper load, and massive wait times.

Governments of India and the Reserve Bank of India have created a conducive policy framework for Microfinance Institutions (MFIs) to ensure legitimacy and impetus to the sector.

The following are the benefits of getting Micro Finance Company Registration:

• Provides access to funding for small businesses.
• Encourage self-sufficiency and entrepreneurship among the rural population.
• It offers a better overall loan repayment rate than traditional banking products.
• Strengthen the financial condition of businesses or people requiring instant capital.
• Helps in meeting credit needs for such a population range by offering various loans like emergency loans, consumption loans, business loans, working capital loans, housing, etc.

Different Categories of Micro-Finance Companies

Microfinance can be broadly categorized into 3 types, based on type of products:

a) Micro-loans –Microfinance loans are significantly different from others as these are provided to borrowers without any collateral. The aim of these small loans is to have its recipients outgrow smaller loans and be ready for traditional bank loans.

b) Micro-savings – Micro-savings accounts are a unique concept as they allow entrepreneurs to operate savings accounts with no minimum balance. The main objective of such accounts is to help users inculcate financial discipline and develop a habit of saving for the future.

c) Micro-insurance– Micro-insurance is a uniquely designed insurance cover provided to borrowers of microloans and its distinct feature is that these insurance plans have much lower premiums than traditional insurance policies.

Brief About Micro Finance Business

Micro Finance Institutions (MFIs) in India have played a major role in its overall development, as these institutions have empowered underprivileged people by extending monetary support to all communities and regions. The MFIs have gained a foothold in rural areas and underdeveloped areas, where nationalized banks are yet to reach. Thus, by giving opportunities to millions of people to fulfill their dreams and ambitions, these MFIs not only help in the economic growth of the country but also in a fair distribution of wealth in all parts.

Listed below are few most prominent types of Microfinance businesses in India:

1. Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)

Reserve Bank of India (RBI) defines NBFC-MFI as a non-deposit-taking company under NBFC micro finance company registration (other than a company licensed under Section 25 of the Indian Companies Act, 1956) with Minimum Net Owned Funds of Rs.5 crores.

For NBFC incorporation of MFIs in the North Eastern Region of the country, the Minimum Net Owned Funds specified is Rs. 2 crores.

All companies seeking micro finance company registration as NBFC-MFIs must have more than 85% of its net assets as “qualifying assets”.

NBFC – MFIs must fulfill the following criteria for NBFC Micro finance company registration:

• 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;
• The loan amount does not exceed 50,000 in the first cycle and 1,00,000 in subsequent cycles;
• The total indebtedness of the borrower does not exceed 1,00,000;
• Tenure of the loan should not be less than 24 months for loan amount in excess of 15,000 with prepayment without penalty;
• Loan to be extended without collateral;
• The aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
• The loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

NBFC Micro Finance Company Registration Procedure in India

NBFC Micro finance company registration procedure in India to be followed is according to the guidelines specified by the RBI.

Step 1: Register a Company

Step 2: Raise authorized and paid-up capital to Rs.2 crore

Step 3: Deposit Rs.2 crore in fixed deposits and obtain a certificate

Step 4: Get all the certified copies and complete the other RBI formalities

Step 5: Fill online application for micro finance company registration

Step 6: Submit the hard copy of the application for micro finance company registration to the Regional Office of the RBI

After the completion of the NBFC Micro finance company registration procedure in India, the Head Office of RBI shall issue the NBFC license. An applicant can check the status of the application online with the help of acknowledgment number.

2. A Section 8 Company:

Section 8 Company is a company registered under the Companies Act, 2013 for charitable or not-for-profit purposes, which pertains to an established ‘for promoting

• Commerce
• Art
• Science
• Sports
• Education
• Research
• Social Welfare
• Religion
• Charity
• Protection of environment
• Or any such other object’, provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members.

Registration through Section 8

Compared to NBFC-MFI, the requirements for registration of a section 8 Company and apply for central government licenses is quite simple.

Requirements for Registration Under Section 8

Maximum INR 50,000 can be given for the business purpose and INR 125,000 for the residential dwelling.

• No minimum net owned fund requirement.
• No RBI approval is required since RBI has exempted such companies from registration.

3. Nidhi Company:

A Nidhi is a company that seeks micro finance company registered under Section 406 of Companies Act, 2013 and is classified as an NBFC.

“Nidhi” means a company that 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.

The deposits, thus gathered in a Nidhi company are then used for its members or shareholders and the company provides loans or advances, acquires government-issued stocks, bonds, debentures, securities, etc.

A micro finance company registration done as a Nidhi company is regulated by the Ministry of Corporate Affairs and all its financial dealings are monitored by the RBI.

4. Co-operative Society:

A micro finance company registration of a Cooperative Society is done as that of an autonomous association of people united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically controlled business. Thus, cooperatives cannot accept deposits from the general public but are only permitted to do so through their members.

When cooperatives and microfinance go hand in hand and are managed well, as registered under micro finance company registration, then they render help and power to the neediest and help improve their lives.

Cooperatives seeking micro finance company registration are to be done under the conventional state-level cooperative acts, the national level Multi-State Cooperative Societies Act (MSCA 2002), or under the new State-level Mutually Aided Cooperative Societies Act (MACS Act).

FURTHER MICRO FINANCE BUSINESS CAN FURTHER BE CLASSIFIED AS:

• Payday loan business online
• Peer to Peer (P2p) Lending

(a) 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 that 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 that can’t be put off until the next time they get paid.

A payday loan is a unique and practical concept under which small, unsecured short-term cash loans can be borrowed by people to get through the month until their next salary comes in hand.

Typically, Payday loans target the working classes who have difficulty in making two ends meet at the end of each month and these loans need to be repaid within a short period of time. These loans come at a very high cost due to short tenure, urgent nature, and repayment risk associated with it. Payday loans in India are availed by people only in case of an emergency like a medical emergency, wedding, payment of school fees, etc.

(b) Peer to Peer (P2P) Lending:

P2P lending is a form of crowd-funding used to raise loans that 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.

P2P lending works very differently from other financing tools and borrowing from these is not from a financial institution but it is from an individual or group of individuals who are willing to loan money to applicants who are found qualified as per the criteria set by them.

BRIEF PROCEDURE REQUIRED TO BE FOLLOWED FOR SET-UP MICROFINANCE BUSINESS

Step-1 The Applicant Company must comply with the registration requirement under the new Companies Act 2013/ Reserve Bank of India/ Multi-State Cooperative Societies Act, 2002/ Societies Registration Act, 1860 and/or Indian Trust Act 1882.
Step-2 The applicant company must have sufficient net worth according to the micro finance business requirement.
Step-3 Determine your risk-bearing capacity and structure your business.
Step-4 Apply for registration with the regulation agency and obtain the necessary permits/licenses.
Step-5 After satisfaction of all requirements the regulation agency will grant a registration certificate and necessary permits/license as the case may be.

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

MUDS MANAGEMENT is recognized as one of the most-respected, knowledgeable, and pocket-friendly legal and financial solutions company. Give us a call right now at +91 9599653306 and start a conversation immediately for Micro Finance Company Registration.

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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

BRIEF:

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.

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