Section 8 Microfinance Company Registration is the perfect solution. It enables you to establish an organization focused on helping underprivileged communities reduce poverty through accessible microfinance services. Section 8 Microfinance companies are exempt from acquiring an RBI license according to the master circular (RBI/2015-16/15 DNBR (PD) CC.No.052/03.10.119/2015-16) dated July 01, 2015.
Microfinance in India allows for the provision of unsecured loans, including personal loans, group loans, and household loans, with interest rates capped at 26% per annum in compliance with RBI norms. By choosing Section 8 Microfinance Company Registration, you can create a unique pathway for organizations dedicated to social welfare.
Section 8 Microfinance Companies
Micro finance companies are financial businesses that offer small-scale financial services such as loans, credit, or deposits. These companies were created to simplify the credit system for small enterprises, which are unable to obtain a loan from banks owing to their complicated process. As a result, it is usually referred to as a Micro-credit, Micro-benefit Company. They make modest loans to a variety of small companies and people that do not have access to regular banking channels or loan eligibility.
They provide minor loans of less than Rs.50, 000 in rural regions and Rs.125, 000 in metropolitan areas. The Section-8 Company is the easiest way to form a Micro Finance Company in India as per Ministry of Corporate Affairs. Without collecting any additional fees or ensuring security. It can make loans at low interest rates as recommended by the RBI and the central government. They provide significant assistance to all aspects of rural and agricultural development, including revenue and job generation.
Key Features and Regulatory Exemptions of Section 8 Microfinance Companies
- RBI Approval Not Required: Section 8 Microfinance Companies operate without the need for explicit permission from the Reserve Bank of India (RBI), simplifying their establishment and operation.
- No Minimum Capital Requirement: Unlike other financial institutions, there is no mandate for a minimum capital investment of Rs. 5 crores, making it more accessible for entities to start microfinance operations.
- Flexibility in Loan Provisioning: These companies are empowered to offer unsecured loans up to Rs. 50,000 to small businesses and up to Rs. 1.25 lakh for primary residential purposes, effectively addressing their target demographics’ needs.
- Adherence to RBI’s Pricing Guidelines: Despite the exemption from certain regulations, Section 8 companies must comply with the RBI’s stipulations regarding interest rates and processing fees, ensuring fairness and transparency in their operations.
- Legal Rights in Loan Recovery: They are recognized as legitimate financing entities with the legal authority to pursue recovery from defaulters, safeguarding their financial interests.
- Exemption under RBI Act: The RBI’s master circular dated July 1, 2015, exempts Section 8 companies engaged in microfinance from sections 45-IA, 45-IB, and 45-IC of the RBI Act, 1934, provided they focus on micro-lending within specified limits and do not accept public deposits. This exemption underscores the RBI’s support for microfinance activities to elevate the underserved populations’ income levels and living standards without the stringent regulatory framework applicable to typical Non-Banking Financial Companies (NBFCs).
Establishing Microfinance Companies
The Reserve Bank of India (RBI) typically permits only Non-Banking Finance Companies (NBFCs) to engage in financial operations. Nonetheless, the RBI grants specific exemptions to certain businesses, allowing them to undertake financial activities within defined limits.
- Consequently, the registration of a microfinance company can be pursued through two distinct avenues:
- Non-Banking Finance Companies (NBFCs) that are officially registered with the RBI.
- Section 8 Companies are established following Section 8 of the Companies Act, 2013.
The objective of Section 8 Microfinance Company
- Empowering low-income individuals to achieve self-sufficiency by providing them with financial services and opportunities.
- Offering banking services tailored for small monetary transactions to cater to the needs of those traditionally excluded from the banking sector.
- Extending financial support to individuals engaged in various trades and professions, such as transportation, fishing, carpentry, etc., to enhance their economic stability.
- Assisting small businesses in accessing financial services without the need for collateral, thus enabling their growth and sustainability.
- Promoting the active participation of women in economic activities by providing them with financial tools and opportunities to create sustainable livelihoods.
- Facilitating access to quality healthcare services through financial support improves the overall well-being of underserved communities.
Advantages of Operating
- Accessibility to Funding: Microfinance companies are crucial in bridging the financial gap by providing accessible funding options to underserved communities, thus facilitating economic inclusion.
- Promotion of Entrepreneurship: By offering financial services tailored to the needs of small-scale entrepreneurs, these institutions encourage self-reliance and the establishment of new businesses, contributing to economic development.
- High Repayment Rates: Microfinance institutions typically report higher loan repayment rates than conventional banking products, indicating a strong credit discipline among their clientele.
- Short-term Financial Resilience: These companies offer a lifeline to individuals and businesses in need, providing financial stability during temporary hardships and enabling recovery and growth.
- Diverse Credit Solutions: Catering to a wide range of needs, microfinance companies offer various forms of credit assistance, including emergency loans, consumer loans, business loans, working capital loans, and housing loans, thereby addressing the multifaceted financial needs of their target demographic.
Section 8 Micro Finance Company Loan Limits
- Borrowers having a yearly household income of less than Rs. 1, 00,000 in rural areas or less than Rs. 1, 60,000 in urban and semi-urban areas would be eligible.
- The loan amount will be limited to Rs. 60,000 in the first cycle and Rs. 1,000,000 in future cycles.
- The borrower’s total debt will not exceed Rs. 100,000.
- For loans in excess of Rs. 30,000, the loan term cannot be less than 24 months, with no penalty for early repayment.
- The loan will be given with no collateral.
- The total amount of loans issued for income creation is at least 50% of the total amount of loans given by the MFIS.
- The loan can be repaid in weekly, biweekly, or monthly instalments, depending on the borrower’s preference.
Revised RBI Guidelines on Section 8 Microfinance Companies
- Scope of Loans: The Reserve Bank of India has broadened the definition of microfinance loans to include collateral-free lending to households with an annual income of up to INR 3,00,000.
- Repayment Cap: Ensures monthly loan repayments do not surpass 50% of the household’s monthly income, promoting financial responsibility.
- Increased Loan Amounts: Section 8 microfinance companies can now extend loans up to INR 2,40,000 to qualified clients, aiming to meet more significant financial needs.
- Interest Rates Oversight: The RBI insists on keeping interest rates and other associated charges moderate, with supervisory audits to ensure compliance.
- Loan Card Issuance: Each borrower will receive a loan card that comprehensively details the loan amount, interest rate, processing fees, and applicable penalties, increasing transparency and borrower awareness.
- Conversion Requirement: If a Section 8 microfinance company’s assets exceed INR 100 crore, it must transition to an NBFC-MFI within three months, allowing it to scale operations while remaining a non-profit.
- No Shift to For-Profit: This requirement facilitates the growth of large microfinance entities without mandating a change to their foundational non-profit nature.
Section 8 Microfinance Company Registration
Section 8 Microfinance Company Registration pertains to establishing non-profit organizations under the Companies Act 2013, aimed at furthering charitable goals, including education, art, commerce, and more. When integrated into the microfinance industry, it leads to the creation of entities focused on offering financial assistance to underserved populations.
Prerequisites for Section 8 Microfinance Company
| Prerequisite | Section 8 Company |
| Approval of RBI | Not Required |
| Net Owned Funds | No minimum requirement |
| Director Experience | No prior experience is required |
| Limit on Loans | Unsecured loan of Rs 50,000 to small business; Loan up to Rs 1.25 lakh for residential purposes |
| Complexity of Registration | Relatively simple, registered as a non-profit organization |
| Adhering to Compliances | Must adhere to RBI compliance, but less stringent compared to NBFC |
| Number of Members | Minimum of 2 members |
| Status of Organization | Non-profit organization |
- Digital Signature Certificate (DSC) and Director Identification Number (DIN): Essential for e-filing by all directors.
- Name Approval: Submit Form INC-1 for a name that reflects your focus on microfinance.
- Memorandum of Association (MoA) and Articles of Association (AoA): These critical documents outline the company’s social objectives.
- Incorporation: Complete e-Form alongside the MoA, AoA, and supporting documents.
- PAN and TAN Registration: Necessary for tax compliance.
- Bank Account Opening: Choose a bank that understands the requirements of Section 8 Microfinance Companies.
FAQs
What is the governance structure of a Section 8 Microfinance Company?
The governance structure typically includes a board of directors responsible for overseeing the organization’s activities and ensuring compliance with the regulations governing non-profit entities.
How a section 8 microfinance company withdraw the profit?
Section 8 microfinance companies can not withdraw the profit as these companies does not have the power to issue dividend to its shareholders, the supreme way to get the interest on loan from company is good instead of profit.
