April 24, 2024

A good place to start would be to ask ourselves, “What is MRR?”. In a nutshell, MRR measures the predictable, recurring revenue generated from customers on a monthly basis. As well as thinking about monthly recurring revenue in terms of meaning, it should also be noted that it’s an important metric for subscription-based companies, too. This is because it helps them forecast future revenue, identify growth trends and make strategic decisions. What is Monthly Recurring Revenue (MRR)? Monthly recurring revenue (MRR) is a financial metric that shows the revenue that a company expects to receive monthly from customers for providing them with products or services. Essentially, MRR measures the company’s normalized monthly revenue. Revenue normalization is critical for companies that offer various pricing plans for their products or services. MRR provides an average number for a company’s recurring monthly revenue. It is commonly used by Software-as-a-Service (SaaS) companies that generate revenues using a subscription-based model. Although MRR is not recognized by the accounting standards such as GAAP or IFRS, investors still monitor the metric. By analyzing a company’s MRR trend from month to month, investors can quickly evaluate its growth. Therefore, most public companies that use a SaaS business model report the metric in their quarterly and annual reports. When Do We Use Monthly Recurring Revenue? Monthly recurring revenue offers some important applications for companies. First, companies calculate the metric for financial forecasting. Consistency and predictability of the MRR ensure that a company can easily forecast its future revenue. When a company sees multiple periods with consistent monthly recurring revenues, it can easily model revenues into the future. Monthly recurring revenue is used to evaluate a company’s growth trends. Again, MRR provides a smooth and normalized view of the revenues. Thus, a company can determine consistent and comparable growth trends. Types of MRR New MRRMRR generated by new subscribers who have recently signed up for a product or service, representing the growth that occurred in the customer base. Expansion MRRMRR generated by existing subscribers who have upgraded their subscription or added additional services or features, representing the increase in revenue per customer. Churn MRRMRR lost due to customers cancelling their subscriptions, representing the loss of revenue due to customer attrition during that month. Reactivation MRRMRR from subscribers who had previously cancelled their subscription but have now returned, representing the regained revenue due to customer retention. Contraction MRRMRR lost due to existing subscribers downgrading their subscription or removing services or features, representing the loss of revenue per customer. Net New MRRThe sum of New MRR and Expansion MRR, minus the Churn MRR and Contraction MRR, representing the overall growth in monthly recurring revenue. How to Calculate MRR? 1. From the Revenue per Customer- The easiest method to calculate the monthly recurring revenue is by determining the monthly recurring revenue per customer. First, we calculate the monthly revenue from each customer. Then, we find the sum of all revenues obtained from customers. 2. Using Average Revenue per User (ARPU)-Another method to calculate the MRR is by using the average revenue per user (ARPU). The first step in this method is the calculation of the monthly ARPU. It can be done using the following formula:     Note that all figures used in the formula above must be determined on a monthly basis. After identifying the company’s monthly ARPU, calculate the MRR using the formula below:   Why MRR is important for businesses Knowing about MMR and its meaning is not enough. MRR is a powerful metric for companies who use a subscription-based business model, because it allows them to predict future revenue, identify growth trends, pinpoint problem areas and make strategic decisions. For example, if a company has a steady MRR growth rate of 10% per month, they can predict that their revenue will double every seven months. This information can inform decisions on hiring, product development and marketing strategy. Similarly, if a company sees a decrease in MRR, it might indicate that they are losing customers. The company can then investigate the cause of the problem and make changes to improve retention. FAQs What is the difference between MRR and ARR (Annual Recurring Revenue)? MRR measures the monthly revenue generated from subscriptions, while ARR measures the annual revenue generated from subscriptions. ARR is often used for annual contracts, while MRR provides a more granular view of revenue on a monthly basis. How can businesses increase their MRR? Businesses can increase their MRR by acquiring new customers, upselling or cross-selling additional products or features to existing customers, retaining customers by reducing churn, and increasing prices or introducing new pricing tiers. What factors can impact MRR growth? Factors such as customer acquisition rate, churn rate, expansion revenue from existing customers, changes in pricing, and changes in the number of subscribers can all impact MRR growth. 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Ever since the independence, banking had been the backbone of the Indian Economy. The growth prospective of our nation is based on its well-built banking system. And in recent times, the Indian Banking Industry has witnessed continued growth in demand and this substantially increasing market size of the Banking Industry clearly indicates its growth potential, and thus forming a Banking Company can be absolutely lucrative. But unlike the unregulated markets, the formation of a Banking Company entails the awareness of a variety of legal issues. And thus, accordingly, the present article discusses and explains the various matters relating to the formation of a Banking Company in India. The Banking Industry as it stands today is just limited to just 34 Banking Companies, out of which 12 are public sector banks and the remaining 22 are private sector banks. Statistically, the banking industry in India yields 7.7% of the nation’s GDP and has a market size of around 105 Trillion Rupees. Despite all these facts, 20% of the Indian population doesn’t have a bank account, and this fact clearly indicates the growth potential of the banking industry in India. Meaning of the word bank and banking company The definition of the words Banking and Banking Company is been provided under Section 5(b) and Section 5(c) of the Banking Regulation Act, 1949 (herein referred to as the Act) respectively.  Section 5(b) of the Act provides for the feature of Banking. These features are: Accepting deposits from the general public,  Lending or further investing the money received from such deposits,  The money is repayable on demand, and The money deposited can be withdrawn by cheque, draft, order or otherwise.  Section 5(c) of the Act defines banking company as a company which transacts the business of banking. The explanation to the section makes it clear that any company which accepts deposits merely for the purpose of financing its business will not be treated as a banking company. This explanation had been added because Section 58-A of the Companies Act also empowers the company to accept deposits from public.  Business of banking  section 6 of the Act provides for the activities that constitutes the business of banking.  Borrowing, raising or taking up of money; Advancing of money; Making, accepting, discounting of bill of exchange, pro notes, bill of lading, railway receipts, etc; Acting as an agent of the government to carry the work of clearing and forwarding of goods; Contracting, negotiation, and issuing public and private loans; Insuring, guaranteeing, underwriting, participating of shares, stocks, debentures, of any company; Managing, selling, realizing any property which comes into possession of company; Undertaking and executing trusts; Administration of estates; Selling, managing, exchanging, leasing, mortgaging or dealing of any part of company’s property, etc; Other tasks incidental to the above-mentioned functions; Any other function as notified by the central government.  Registration of a company under the provisions of the Companies Act The first and the foremost requirement for the formation of a banking company in India is that the applicant needs to be a ‘Company’ formed under the provisions of The Companies Act, 1956. Any person who wishes to start a banking business in India needs to set up a separate legal entity distinct from is owner. The procedure for the formation of a company is given under Section 7 of the Act. Every company needs to register itself with the registrar of the company, by filing an application and submitting the relevant documents like MoA and AoA. If the registrar is satisfied with all documents, then he will issue a certificate of registration under Section 7(1).  Capital requirements Section Place of Incorporation Capital Required 11(2) Banking Company Incorporated Outside India (Foreign Banking Company) If business is in the city of Bombay or Calcutta: amount of its paid up capital shall not be below twenty lakhs rupees. If no business in the city of Bombay or Calcutta: amount of its paid up capital shall not be below fifteen lakhs rupees. 11(3) Banking Company is Incorporated in India If it has place of business in more than one state: five lakhs rupee and if such a place is Bombay or Calcutta then ten lakh rupees. If it has place of business in more than one state none of which is situated in Bombay or Calcutta: One Lakh rupees in respect of the principal place of business + Ten Thousand rupees for each place where its business is situated in same district, + Twenty five thousand rupees of each place of business situated elsewhere in the state other than in the district.  If it has a place of business in one state, one or more of which is situated in Bombay or Calcutta: Five lakh rupees + twenty five thousand rupees for each place outside Bombay and Calcutta.  Points to be noted: Provided further that no banking company incorporated in India shall be required to have a paid-up capital requirement exceeding ten lakh rupees.  The amount stated above needs to be deposited and keep deposited with the Reserve Bank of India, either in cash or in any form is unencumbered approved security. These are just the statutory requirements of capital and reserves. But in actuality, the Reserve Bank of India prescribes the guidelines for licensing of a new banking business in India. The capital requirements for the formation of a new banking company is required to be maintained according to the guidelines of the RBI. Management of the banking companies So according to Section 10-A every company is required to constitute a Board of Directors, and while constituting the BOD the following points need to be considered: 51% of the members of the BOD should have special knowledge or practical experience in the field of accounts, banking, finance, law, agriculture and rural development, Co-operation, small scale industry or any other field as prescribed by the Reserve Bank of India.  None of the members of the BOD shall have a substantial interest in the company and must not be connected to the company as a manager, agent, employee, etc (this provision does not applies to a company registered under Section 25 of the Companies Act). The members should not be a member of any trading, commercial or industrial concerns.  No director shall hold

Foreign banks wishing to open a branch in India require a license under the Banking Regulation Act, 1949. India issues a single class of banking license unlike some other countries. No undue restrictions are placed on them on their operations. In some countries there is a requirement of multiple licenses for dealing in local currency and foreign currencies with different categories if clientele. Like domestic banks, foreign banks enjoy similar facilities to the payments and settlement systems and they are admitted as full members of clearing houses and payments system. Procedurally, foreign banks are required to apply to RBI for opening their branches in India. Foreign banks’ application for opening their maiden branch is considered under the provisions of Section 22 of the Banking Regulation Act,1949. Before granting any license under this section, RBI may require to be satisfied that the Government or the law of the country in which it is incorporated does not discriminate in any way against banks from India. Other conditions as enumerated in Section 2(5) of the Banking Regulation Act, 1949 are also required to be fulfilled. the restrictive practices of certain foreign countries, India in respect of the licensing and operation of the foreign bank branches as illustrated by the following India issues a single class of banking license to foreign banks and does not place any limitations on their operations. All banks can carry on both retail and wholesale banking. Deposit insurance cover is uniformly available to all foreign banks operating in India at a non-discriminatory rate of premium. The norms for capital adequacy, income recognition and asset classification are by and large the same. Other procedural norms such as exposure limits are the same as those applicable to Indian banks. The salient features of continuous authorization policy (a) Individuals/ professionals who are ‘residents’ or (‘residents’ as per FEMA definition) with        10 years of experience in banking and finance at a senior level would be eligible to promote banks, singly or jointly. (b) Entities/ groups in the private sector which are ‘owned and controlled by ‘residents’ [as per FEMA definition], having a successful track record for at least 10 years, with total assets of Rs. 50 billion or more, where in non-financial business of the group does not exceed 40% or more in terms of total assets/ in terms of gross income are also eligible to promote banks. (c) Existing Non- Banking Financial Companies (NBFCs), that are ‘controlled by residents’ [as per FEMA definition], with a successful track record for at least 10 years will be eligible to convert into a bank or promote a new bank. [Note: Any NBFC, which is a part of the group that has total assets of Rs. 50 billion or more and that the non-financial business of the group accounts for 40 per cent or more in terms of total assets/ in terms of gross income, is not eligible]. d) ‘Fit and Proper’ criteria: The RBI assess the promoters under the following parameters to decide whether such promoters are’ fit and proper’ for promoting banks.        (i) Where promoters are individuals: Each of the promoters should have a minimum 10    years of experience in banking and finance at a senior level. The Promoters should have a past record   of sound credentials and integrity. The Promoters should be financially sound and should have a successful track record for at least 10 years.       (ii) Where promoters are entities/ NBFCs: The promoting entity/ promoter group should have a minimum 10 years of experience in running its/ their businesses. The promoting entity and the promoter group should have a past record of sound credentials and integrity. The promoting entity and the promoter group should be financially sound and should have a successful track record for at least 10 years. Preference will be given to promoting entities having diversified shareholding. FAQs What are the regulatory requirements for a foreign company to operate as a bank in India? The foreign company must meet the eligibility criteria set by the RBI, including minimum capital requirements, experience in banking operations, and adherence to prudential norms. Additionally, it needs to obtain the necessary approvals and licenses from the RBI. What types of banking activities can a foreign company undertake in India? Depending on the type of license granted by the RBI, a foreign company can engage in various banking activities such as accepting deposits, lending, providing investment services, and offering other financial products. Are there any restrictions on foreign ownership or control of banks in India? Yes, the RBI imposes restrictions on the extent of foreign ownership or control of banks in India. These restrictions may vary depending on factors such as the type of bank and the regulatory framework in place at the time. 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