Microfinance Companies in India- Setup via NBFC

What is a Microfinance Company?

A microfinance institution is an organization that offers financial services to low income populations. Microfinance companies/ institutions provide services to unemployed or to the individuals with low income because most of the people who are poor or who do not have enough financial resources and do not have enough income to do the business with traditional financial institutions. In India there are two ways to establish a Microfinance company 1. Microfinance Company as Non-Banking Finance Company (NBFC- duly registered with RBI).

How does Microfinance Company / Institution work?

• Microfinance is a banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services. 
• It allows people to take on reasonable small business loans safely, and in a manner that is consistent with ethical lending practices. 
• Like conventional lenders, micro financiers charge interest on loans and institute specific repayment plans.
• In many instances, people seeking help from microfinance organizations are first required to take a basic money-management class.
• Lessons cover understanding interest rates, the concept of cash flow, how financing agreements and savings accounts work, how to budget, and how to manage debt.

Objective of Microfinance Company / Institutions

Following are the main objectives of Microfinance Company:

• To give an opportunity to people in the low-income group to become self-sufficient.
• Offer banking services at small monetary amounts.
• To provide financial assistance to individuals who work in varied trades like transportation, fishing, carpentry etc.
• Offer financial assistance to small enterprises that can not afford any collateral.
• Increase the participation of women in generating sustainable livelihood.
• Provide access to quality healthcare.
• Increase and enrich the mode of livelihood for low-income individuals and creating opportunities for self-employment.

Ways of registering a Microfinance company

Ideally, any finance business is authorized only to Non-Banking Finance Companies (NBFC). However, some business forms have been given exemption by the Reserve Bank of India (RBI) to do finance activities up to a certain extent.

Following are the two most ideal forms of business that can run Microfinance Institutions (MFI):

1. Non-Banking Finance Company (NBFC- duly registered with RBI)
2. Section 8 Companies

Let us now discuss Microfinance business as NBFC in detail.

NBFC- Non Banking Finance Company

A company registered with RBI with a motive to run a microfinance institution is known as NBFC –MFI (Microfinance Company). If any NBFC needs deposits, then it needs to get a separate status from the Reserve Bank of India (RBI). To get the deposit taking status, a separate application needs to be filed with the Reserve Bank of India (RBI).

Basic features of registering Microfinance company as NBFC

• One of the directors should have an experience of more than ten years in financial services.
• Minimum Funds of Rs.5 crore and Rs.2 crore for registered in North-Eastern states.
• Cannot accept security deposits.
• It should have a CIBIL membership and Credit Information Companies membership.
• It has to be a member of one of the self-regulatory organisations in the country.
• Should not extend loans to microfinance sectors more than 10% of the total assets.

Process of registering Microfinance Company as NBFC

Step 1: Register a Company

Step 2: Raise Authorized and paid up capital to Rs.2 crores

Step 3: Deposit Rs.2 crores. 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

Step 6: Submit the hard copy of the application to the  Regional Office of the RBI

Step 7: Wait and coordinate with the Reserve Bank of India (RBI) for further instructions

1. Register a Company

The First and very important step to start a Microfinance Company is to register the Company. The company can be registered as a Private Limited company or Public Limited Company.

Documents required to register NBFC as Private Limited Company:

• Copy of PAN CARD
• ID Proof (Driving License, Passport, Aadhaar Card, Voter ID)
• Address Proof (Bank Statement, electricity bill, Mobile Bill, Telephone Bill)
• Passport Size photo
• Rent agreement or ownership documents
• Electricity bill
• A copy of No Objection Certificate (NOC) from the owner

2. Raise Authorized and Paid up Share Capital

The next step would be to raise the authorized and paid up share capital for NBFC. The minimum net worth required to register an NBFC is INR 2 Crore.

3. Deposit the Amount in Fixed Deposit

The 3rd step would be to deposit the amount of share capital i.e. INR 2 crores in the Fixed deposit. The Account should be freshly opened. Also, you need to get a ‘No lien’ certificate from the bank which will be needed when the application is filed with RBI.

4. Certified copies of the Documents

To fill the online application available on the RBI website, the following documents are required:

• Memorandum of Association and Articles of Association
• Incorporation certificate of the company
• Copy of Board resolution
• Copy of Auditor’s report of receipt of Fixed deposit receipt
• Banker’s Certificate of No Lien stating the Net Owned Fund
• Banker’s Report about the company
• Recent credit report of the directors
• Net worth certificate of the directors
• Education/Professional qualification proof of the Director
• KYC and income proof of the director
• Proof of work experience in the financial sector
• Structure plan of the organisation

5. Fill online application

For Filing the form online you need to visit the official website of RBI. There you need to download a suitable application form which is for NBFC registration. Fill up the application form, and upload it to the same website.

Once you upload the form, the company would be provided with a Company Application Reference Number for the same.

6. Submit the hard copy of the application to the  Regional Office of the RBI

Once the application has been filed online, the hard copy of the same application needs to be submitted to the concerned Regional Office by the applicant company along with the Company Application Number and supporting documents. The status of the application can be tracked by using the CoA number given.

7. Coordinate with the Reserve Bank of India (RBI) for further instructions

The next and final step would be to wait and coordinate with the Reserve Bank of India for further instructions, if any. And act accordingly.

Conclusion

When you start a Microfinance company through NBFC, what we need to do is to have faith in microfinance. Though there are challenges but one can overcome this with creating their own market.