Microfinance companies, as the name suggests, are financial institutions that provide finances to low-income groups, where the finance requirement is lesser as compared to other sectors of the society. These sectors generally do not have access to traditional financial institutions such as banks and other financial institutions.
What is Microfinance Company?
Microfinance company registered under the Indian Companies Act, 2013. With the objective of providing financial to small business groups who are excluded from the formal banking system. Simply put, getting a loan from the bank is a tedious process. A Microfinance Company can offer loans, insurance, and other products to its clients without requiring any collateral or security. The aim of a Microfinance Company is to promote social welfare and economic development among the poor and marginalized sections of society.
What are the features of a Microfinance Company?
- It is registered with the Registrar of Companies (ROC) as a non-profit organization under Section 8 of the Companies Act, 2013.
- It does not need to obtain a license from the Reserve Bank of India to operate as a microfinance institution as long as it follows the RBI guidelines on microfinance lending.
- It can charge interest rates of up to 26% p.a. On its loans, which is higher than the rates charged by banks and other regulated financial institutions.
- It can sue the defaulter in case of non-payment of pending Loans.
- It has to comply with the provisions of the Companies Act 2013 and file annual reports and returns with the ROC and the Ministry of Corporate Affairs (MCA).
- It can also engage in other incidental or facilitative activities to its main objectives, such as education, health, sanitation, environment, etc.
- There is no demographic barrier to Microfinance Company.
- No minimum capital requirement.
- It can lend unsecured loans.
Need for Microfinance Companies
- It provides financial assistance to enterprises that cannot place collateral
- It encourages women entrepreneurship
- It provides startups with much-needed support
- It offers assistance even for nominal amounts which generally are funded as hand loans
- It formalizes the process of lending and hence brings about discipline in borrowing by low-income groups. This prevents over-borrowing and reduces complications arising out of high future debts.
Formation of Microfinance Companies
Prerequisites for Microfinance Company Registration
| Prerequisites | NBFC | Section 8 company |
| Approval of RBI | Mandatory | Not Required |
| Net owned funds | Minimum 5 crores | No minimum requirement |
| Director experience | One director must have experience of more than 10 years in financial services | No prior experience required |
| Limit on loans | Maximum of 10% of total assets | Unsecured loan of Rs 50,000 to small businessLoan up to Rs1.25 lakh to dwelling residence |
| Complexity of Microfinance Company Registration | All processes involved in forming a company have to be performed. | Relatively simple as it is registered as a non-profit organization |
| Adhering to Compliances | It has to adhere to all compliances of an NBFC. | Adhere to compliance of RBI, but they are less stringent in comparison to NBFC |
| No of members | For a private limited company minimum of 2 For a public limited company minimum of 7 | Minimum of 2 members |
| Status of organization | Profit organization | Non-profitable organization |
Microfinance Company Registration as an NBFC
- Register a company: To be registered as an NBFC microfinance company, the first step is to form a private or a public company. To form a private company, at least 2 members and a capital of Rs 1 lakh is required. To form a public company, at least 7 members are required.
- Raise capital: The subsequent step is to raise the required minimum net owned funds of Rs 5 crore. For the northeastern region the requirement is of Rs 2 crore.
- Deposit the capital: On collection of capital, the next step is to deposit the capital in a bank as a fixed deposit and obtain a ‘No lien’ certificate for the same.
- Apply for license: Finally, the NBFC must fill an online application for the license and submit it along with all the certified documents. A hard copy of the application and license must also be submitted at the regional office of Reserve Bank of India. The documents that must be available with the NBFC at the time of filing are:
- Memorandum of Association and Articles of Association
- Incorporation certificate of the company
- Board resolution copy
- 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 organization
Microfinance Company Registration as a Section 8 Company
- Apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN): To form a company, the first process is to apply for a DSC and DIN. The DSC is essential for authorizing the e-forms.
- Apply for name approval: The next step is to apply for name approval in Form INC-1. The name must suggest that it is registered as a Section 8 company. So it must have the words sanstha, foundation or micro credit.
- File Memorandum of Association (MOA) and Articles of Association (AOA): Post the name approval; the company must draft the MOA and AOA and file it along with necessary documents.
- File all relevant documents: The last step is to file all relevant documents along with the incorporation certificate, and Form INC -12 to obtain a license. The primary basic documents required for registering a company under both the models are:
- PAN Card copy of all directors/promoters
- Documents for identity proof
- Documents for address proof
- Photograph of all directors/promoters
- Proof of ownership of registered office or rental agreement for the same
- NOC from the owner
- Applicable stamp duty as mandated by the state
- Any other documents as required
FAQs
What is the difference between a Section 8 company and NGO?
A company with charitable purposes can be incorporated as a Section 8 Company under the Companies Act 2013. This type of company can get funding from the government and other sources. On the other hand, an NGO is an organization that works for a social cause, usually charitable. A Section 8 Company differs from an NGO in that it aims to promote commerce, science, art, charity, religion, or any other useful object for society’s benefit.
Which authority regulates Microfinance companies in India?
The Reserve Bank or the RBI regulates microfinance companies like all other financial institutions in India