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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1. An NBFC-P2P shall be required to disclose the following:
   1. to the lender
      1. details about the borrower/s including personal identity, required amount, interest rate sought and credit score as arrived by the NBFC-P2P.
      2. details about all the terms and conditions of the loan, including likely return, fees and taxes;
   2. to the borrower
      • details about the lender/s including proposed amount, interest rate offered but excluding personal identity and contact details;
   3. publicly disclose on its website
      1. overview of credit assessment/score methodology and factors considered;
      2. disclosures on usage/protection of data;
      3. grievance redressal mechanism;
      4. portfolio performance including share of non-performing assets on a monthly basis and segregation by age; and
      5. its broad business model.
2. NBFC-P2P shall ensure that the providing of services to a participant, who has applied for availing of such services, is backed by appropriate agreements between the participants and the NBFC-P2P. The agreements shall categorically specify all the terms and conditions among the borrower, the lender and the NBFC-P2P.
3. The interest rates displayed on the platform shall be in Annualized Percentage Rate (APR) format.

Participant Grievance Redressal

1. An NBFC-P2P shall put in place a Board approved policy to address participant grievances/complaints. Complaints shall be handled/ disposed of by NBFC-P2P within such time and in such manner as provided for in its Board approved policy, but in any case not beyond a period of one month from the date of receipt.
2. At the operational level, NBFC-P2P shall display the following information prominently, for the benefit of participants, on the website:
   1. the name and contact details (Telephone / Mobile Nos. as also email address) of the Grievance Redressal Officer who can be approached for resolution of complaints against the NBFC-P2P.
   2. that if the complaint / dispute is not redressed within a period of one month, the participant may appeal to the Customer Education and Protection Department of the Bank.

Information Technology Framework, Data Security and Business Continuity Plan

1. Business of an NBFC-P2P shall be primarily Information Technology (IT) driven. The technology should be scalable to handle growth in business.
2. There should be adequate safeguards built in its IT systems to ensure that it is protected against unauthorized access, alteration, destruction, disclosure or dissemination of records and data. The Bank may from time to time, prescribe technical specifications, as deemed fit.
3. NBFC-P2P should have a Board approved Business Continuity Plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of platform.
4. Information System Audit of the internal systems and processes shall be in place and shall be conducted at least once in two years by CISA certified external auditors. Report of the external auditor shall be submitted to the Regional Office of the Department of Non-Banking Supervision of the Bank, under whose jurisdiction the Registered Office of the NBFC-P2P is located, within one month of submission of the report by the external auditor.
5. There shall be reasonable arrangements in place to ensure that loan agreements facilitated on the platform will continue to be managed and administered by a third party in accordance with the contract terms, if the NBFC-P2P ceases to carry on the P2P activity.
6. NBFC-P2P would be required to conform with Master Direction DNBS.PPD. No. 04/66.15.001/2016-17 dated June 8, 2017 on Information Technology Framework for NBFC Sector, as stipulated in Section A from inception

Fit and Proper Criteria

1. An NBFC-P2P shall
   1. ensure that a policy is put in place, with the approval of the Board of Directors, setting out ‘Fit and Proper’ criteria to be met by its directors.
   2. ensure that Directors meet the fit and proper criteria at the time of their appointment and on an ongoing basis, certify and inform the same to the Bank on a half-yearly basis;
   3. obtain a declaration and undertaking from the Directors giving additional information.
   4. obtain a Deed of Covenants signed by the Directors.
   5. advise the Bank of any change of Directors, or key management personnel, and issue a certificate from the Managing Director/CEO of the NBFC-P2P that fit and proper criteria in selection of the Directors have been followed. The statement must reach the Regional Office of the Department of Non-Banking Supervision of the Bank under whose jurisdiction the Registered Office of the NBFC-P2P is located, within 15 days of the change. An annual statement shall be submitted by the CEO of the NBFC-P2P to the said Regional Office, giving the names of its Directors for the quarter ending on March 31, which should be certified by the auditors.The Bank, if it deems fit and in public interest, may independently assess whether the directors are, individually or collectively, fit and proper and the NBFC-P2P shall remove the concerned director/s, on being advised by the Bank to do so.

Requirement to obtain prior approval of the Bank for allotment of shares, acquisition or transfer of control of NBFC-P2P

Prior written permission of the Bank shall be required for –

1. any allotment of shares which will take the aggregate holding of an individual or group to equivalent of 26 per cent and more of the paid up capital of the NBFC-P2P; Explantation: For the purpose of this paragraph, the term
   1. “holding” refers to both direct and indirect holding, beneficial or otherwise. The holding will be computed with reference to the holding of the applicant, relatives (where the applicant is a natural person) and associated enterprises.
   2. “relative” has the same meaning as assigned under section 2(77) of the Companies Act, 2013.
   3. “associate enterprise” has the same meaning as assigned to it in Explanation I to Section 12B of the Banking Regulation Act, 1949.
2. any takeover or acquisition of control of an NBFC-P2P, which may or may not result in change of management;
3. any change in the shareholding of an NBFC-P2P, including progressive increases over time, which would result in acquisition by/ transfer of shareholding to, any entity, of 26 per cent or more of the paid up equity capital of the NBFC-P2P; Provided that, prior approval would not be required in case of any shareholding going beyond 26% due to buyback of shares / reduction in capital where it has approval of a competent Court. The same is to be reported to the Bank not later than one month from its occurrence;
4. any change in the management of the NBFC-P2P which would result in change in more than 30 per cent of the Directors, excluding independent Directors;
5. any change in share holding that will give the acquirer a right to nominate a Director.

Application for Prior approval

1. An NBFC-P2P shall submit an application, on the company letter head, for obtaining prior approval of the Bank, along with the following documents:
   1. Information about the proposed Directors/ shareholders
   2. Sources of funds of the proposed shareholders acquiring the shares in the NBFC-P2P;
   3. Declaration by the proposed Directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;
   4. Declaration by the proposed Directors/ shareholders that they are not associated with any company, the application for CoR of which has been rejected by the Bank;
   5. Declaration by the proposed Directors/ shareholders that they have not been convicted of any crime and that there are no pending criminal cases against them, including proceedings initiated under section 138 of the Negotiable Instruments Act,1881; and
   6. Bankers’ Report on the proposed Directors / shareholders.

Public Notice about Change in Control/ Management

1. Applications in this regard shall be submitted to the Regional Office of the Department of Non-Banking Supervision of the Bank where the company is registered.
2. A public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the NBFC-P2P and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Bank.
3. The public notice shall indicate the intention to sell or transfer ownership/control, the particulars of transferee and the reasons for such sale or transfer of ownership/ control. The notice shall be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper.

Information with respect to change of address, directors, auditors, etc. to be submitted

1. Every NBFC-P2P shall communicate, not later than one month from the occurrence of any change in:
   1. the complete postal address, telephone number/s and fax number/s of the registered / corporate office;
   2. the residential addresses of the Directors of the company;
   3. the names and office address of the auditors of the company; and
   4. the specimen signatures of the officers authorised to sign on behalf of the NBFC-P2P to the Regional Office of the Department of Non-Banking Supervision of the Bank within whose jurisdiction the Registered Office of the NBFC-P2P is located.

Reporting Requirements

1. The Bank may, from time to time, prescribe return/s to be submitted by NBFC-P2P, as it deems fit.
2. The following quarterly statements shall be submitted to the aforesaid Regional Office within 15 days after the quarter to which these relate.
3. A statement, showing the number and amount in respect of loans;
4. a. disbursed during the quarter;
   b. closed during the quarter; and
   c. outstanding at the beginning and at the end of the quarter, including the number of lenders and borrowers outstanding as at the end of the quarter
5. The amount of funds held in the Escrow Account, bifurcated into funds received from lenders and funds received from borrowers, with credit and debit summations for the quarter.
6. Number of complaints outstanding at beginning and at end of quarter, and disposed of during the quarter, bifurcated as received from
   a. lenders and
   b. borrowers.
7. The Leverage Ratio, with details of its numerator and denominator.

Like NBFC registration for all entities, all NBFC-P2P Companies should also be registered under the Companies Act, 2013 or in case of existing Company under previous Company Act.

For the NBFC incorporation of a prospective NBFC-P2P, the company is required to make an application for registration to the Department of Non-Banking Regulation of the RBI.

No NBFC-P2P shall commence or carry on the business of a Peer to Peer Lending Platform without obtaining a Certificate of Registration (CoR) from the RBI. Thus, Peer to Peer lending registration is subject to a company fulfilling all the conditions specified by the RBI.

The Reserve Bank of India issued a Notification dated August 24, 2017 in terms of sub-clause (iii) of clause (f) of section 45I of the Reserve Bank of India Act, 1934.

This notification enumerates the Directions for compliance by every Non-Banking Financial Company that carries on the business of a Peer to Peer Lending Platform.

These Directions are known as the Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 and came into force with immediate effect.

This notification is an extensive statement that outlines in detail the various rules and regulations that all existing and prospective entities carrying on or intending to carry on the business of Peer-to-Peer (P2P) lending, commonly known as NBFC-P2P, will have to comply with.

An NBFC-P2P can act only as an intermediary that provides an online platform to the participants, that is, borrowers and lenders, involved in P2P lending. It must also ensure compliance to legal requirements applicable to the participants as mandated under relevant laws (including the KYC Directions prescribed by RBI). It is also required to store and process all data relating to its and its participants activities on hardware located within India.

The Master Directions, thus, provide a framework for the registration and operation of NBFC-P2Ps in India and some of the important disclosure, code and varied requirements to be followed by NBFC – P2P are mentioned below.

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.

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Why not give them a call right now at +91 9599653306 and start a conversation immediately.

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