Financial exclusion has been an unsaid apparent evil in Indian society. As per the World Bank’s Global Financial Inclusion Database, around 53% of adults in India had access to formal financial services in 2014. The percentage has gradually increased in India, and currently, around 90% of the total population above 18 years old have access to an account at a formal financial institution, as per the report. Between 2014 and 2022, as more people gained access to banking, many people turned to microfinance for financial help. Microfinance in India has emerged as a powerful tool that has helped shape the country’s financial landscape. Microfinance institutes are financial companies different from banks that aim to provide small loans to people who don’t have access to formal banking facilities in India. Unlike traditional methods of lending money, people in rural areas have taken advantage of obtaining loans at a lesser percentage from microfinance institutes. The facility has thus fostered economic growth in India.
What is Microfinance?
Microfinance means a range of financial services provided to low-income individuals or groups who do not have access to traditional banking. These services include small loans ranging from Rs. 5000 to Rs. 1,00,000/- and insurance. The goal behind setting up the microfinance institutes in India is to eradicate poverty and uplift society by giving the people below the poverty line (BPL) an opportunity where they can develop small businesses by taking loans from legal and ethical means.
The Importance of Microfinance in India
The microfinance sector in India is one of the largest in the world. As per the annual report of the Microfinance Institutions Network (MFIN), the microfinance sector made a profit of Rs. 4,33,697 crores in the financial year 2024-2025. The sector is able to make such huge profits because it has been a game changer in the lives of the people of India in the following ways:
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Poverty Reduction
Microfinance gives low-income individuals access to funds that can be used for investments or other productive financial activities. From 2022 to 2023, this access has helped lift about 24.82 crore people in India out of multidimensional poverty. The availability of small loans has empowered people to generate income, support their families, and gradually improve their standard of living.
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Women Empowerment
Women in India have better loan repayment rates than men, which has enabled them to access larger loan amounts with better terms from microfinance companies. With better financial assistance, women, especially in rural areas, have started their own businesses. Financial independence has also enhanced the role of women in family and community decisions, which in turn has opened the doors for leadership roles and better participation in local governance,
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Development of the Nation
With a significant portion of India’s population living in villages, Mahatma Gandhi’s idea that the country’s progress is tied to rural development rings true. Microfinance plays an important role by providing loans without collateral, which helps in the growth of local businesses. Small farmers, artisans, and entrepreneurs with the loan opportunities can invest in tools, and grow their businesses that in future create jobs in within their communities. The local economic contributes significantly to the overall development of the nation.
How to Set Up a Microfinance Company in India?
In India, Microfinance companies can be set up in two ways:
- Non-Banking Finance Companies (NBFCs) that are officially registered with the RBI.
- Under section 8 of the Companies Act, 2013
Non-Banking Finance Companies (NBFCs) that are officially registered with the RBI:
Non-Banking Finance Companies (NBFCs) are companies registered under the Companies Act of 1956 that provide loans and advances, as well as the acquisition of shares/stocks/bonds/debentures/securities issued by the government or local authority. Microfinance Companies registering as Non-Banking Finance Companies need to meet the criteria set by RBI. The criteria include:
- The company must have a minimum NOF of ₹5 crore (₹2 crore for NBFC-MFIs registered in the North Eastern states of India).
- The company have to be a public or private limited company registered under the Companies Act 2013.
- At least 85% of the company’s net assets should be in the form of microfinance loans with amounts not exceeding ₹1.25 lakh in rural areas and ₹2 lakh in urban areas.
Registering with the Ministry of Corporate Affairs (MCA)
It is mandated that the company be incorporated as a private limited company or a public limited company. After the incorporation, a name is chosen for the company There is no bar/limitation/criteria to choose the name of the company registering as a NBFC with MCA. RBI is the governing and monitoring authority that reviews the MoA and AoA of the Micro-finance company registering as NBFC.
Documents Required:
- Incorporation Certificate
- Memorandum of Association (MoA) and Articles of Association (AoA)
- Board Resolution
- KYC Documents of Directors and Shareholders
- Credit Report of Directors
- Net Owned Fund (NOF) Certificate
- Audited Financial Statements
- Report of Banks
- Income Tax Returns (ITRs)
- No Lien Certificate
- Declaration of Directors
Filing the Application with the RBI:
STEP 1: Online Filing
Submit the online application through the COSMOS portal on the RBI’s official website. After submission, the system will generate a Company Application Reference Number (CARN).
STEP 2: Submitting Physical Documents
Within 30 days of filing the application online, the physical copy of the application has to be submitted to the regional office of RBI,
STEP 3: Background Check
Once the documents are submitted physically, the RBI begins a background check on the company’s promoters, directors, and overall setup to ensure the financial stability and integrity of each person who shall manage the Non-Banking Finance Company.
Certificate of Registration (CoR)
If the RBI approves the application and the due diligence checks, a Certificate of Registration (CoR) will be issued by RBI that will grant the company the status of an NBFC-MFI.
Compliance with RBI Guidelines
After receiving the CoR, NBFC-MFI is mandated to comply with the ongoing regulations and guidelines set by the RBI:
- Complying with the interest rate caps prescribed by the RBI to prevent overcharging borrowers.
- Implementing a transparent and fair practices code for dealing with customers.
- Regularly file financial returns, balance sheets, and other required documents with the RBI.
Registration under Section 8 of the Companies Act, 2013
Microfinance companies registered under Section 8 of the Companies Act, 2013 do not require prior approval from the RBI. Companies are permitted to provide unsecured loans of ₹50,000 to small businesses and loans up to ₹1.25 lakh for residential purposes. These companies operate under the status of Non-Profit Organizations under the Companies Act, 2013 and thus no required to walk on the woods.
Important Documents
- Identity and address proofs of the directors/promoters of the company
- PAN Card copies of directors/promoters of the company
- Photographs of directors/promoters of the company
- Proof of registered office of the company or rental agreement
- NOC from the property owner in case the registered office is taken on rent
- State-mandated stamp duty
Process
Step 1: Obtain DSC and DIN
Every director of the registered company in India is required to obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN) from the MCA portal. The process is the same for Microfinance companies.
Step 2: Name Approval
All Non-Profit Organizations, including Microfinance companies, are mandated to incorporate terms like ‘Sansta’, ‘Foundation’, or ‘Micro-Credit’ in their company name. Companies are required to fill Form INC-1 for name approval.
Step 3: Filing MoA and AoA
Companies are required to draft and submit the Memorandum of Association (MoA) and Articles of Association (AoA). It is important to note that once a company files its MoA and AoA, it cannot alter these documents without permission from the Central Government of India.
Step 4: Submitting Section 8 Incorporation Forms
Once you get the green light for your company name, it’s time to file some key forms with the Ministry of Corporate Affairs (MCA). You’ll need to prepare:
- INC-12 form for the application for the Section 8 license.
- INC-13 form for submitting the Memorandum of Association (MoA).
- INC-31 form for submitting the Articles of Association (AoA).
- INC-22 form to give about the registered office of the company.
- DIR-12 form lists the details of the directors in the company.
Step 5: Getting Your Section 8 License
After submitting those forms, the Registrar of Companies (RoC) will take a look. If everything checks out, they’ll issue a license under Section 8, confirming that your company is recognized as a non-profit.
Step 6: Compliance After You’re Incorporated
Now that your company is up and running, there are a few compliance steps to keep in mind:
- PAN and TAN: Apply for a Permanent Account Number (PAN) and a Tax Deduction Account Number (TAN) for your company.
- Open a Bank Account: Make sure to open a bank account in your company’s name.
- Ongoing Filings: The directors need to stay on top of filing annual returns, financial statements, and any other required documents with the RoC on time.
Conclusion
India due to its size and financial diversity offers a great chance for the entrepreneurs to set up MFI that can create an impact in society by providing business opportunities to the people who have less accessibility to banking institutions. Setting up an MFI is not a hard and fast rule in India, it requires following strict procedures mandated by the statutes of India.
FAQs
1. How is the company incorporated under Section 8 of the Companies Act 2013 different from the company incorporated as NBFC?
Section 8 microfinance companies are set up for social good and give loans without trying to make a profit, while NBFC microfinance companies are for-profit and follow stricter rules from the RBI.
2. Do I need RBI approval to start a Section 8 microfinance company?
No, you do not need to get approval from RBI. Section 8 companies are regulated by the Companies Act 2013, not by RBI guidelines.
3. What do NBFC-MFIs need to do to stay compliant after registration?
They have to file financial statements regularly, keep interest rates within limits and have to fair practices when dealing with borrowers.
4. Why are the MoA and AoA important for microfinance companies?
These documents explain what the company does and how it operates. After submitting them, you can’t make any changes without getting approval from the government.
5. What’s the minimum capital needed to register an NBFC-MFI?
To register an NBFC-MFI, a minimum ₹5 crore is needed. But if a person wants the same institute in the North East Part of India, the requirement is only ₹2 crore.
