{"id":31367,"date":"2024-09-26T15:18:19","date_gmt":"2024-09-26T09:48:19","guid":{"rendered":"https:\/\/www.kanakkupillai.com\/new-learn?p=31367"},"modified":"2026-01-30T14:58:07","modified_gmt":"2026-01-30T09:28:07","slug":"ways-to-set-up-a-microfinance-company-in-india","status":"publish","type":"post","link":"https:\/\/www.kanakkupillai.com\/learn\/ways-to-set-up-a-microfinance-company-in-india\/","title":{"rendered":"Ways to Set Up a Microfinance Company in India?"},"content":{"rendered":"

Financial exclusion has been an unsaid apparent evil in Indian society. As per the\u00a0World Bank’s Global Financial Inclusion Database, around 53% of adults in India had access to formal financial services in 2014.\u00a0The 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.<\/span> Between 2014 and 2022, as more people gained access to banking, many people turned to microfinance<\/strong><\/a> for financial help. Microfinance in India has emerged as a powerful tool that has helped shape the country’s financial landscape.\u00a0 Microfinance institutes are financial companies different from banks that aim to provide small loans to people who don\u2019t 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.<\/p>\n

What is Microfinance?<\/h2>\n

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.\u00a0 The goal behind setting up the microfinance institutes in India<\/strong><\/a> 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.<\/p>\n

The Importance of Microfinance in India<\/h2>\n

The microfinance sector in India is one of the largest in the world. As per the\u00a0annual 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\u00a0 of India in the following ways:<\/p>\n

    \n
  1. \n

    Poverty Reduction<\/h3>\n<\/li>\n<\/ol>\n

    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.<\/p>\n

      \n
    1. \n

      Women Empowerment<\/h3>\n<\/li>\n<\/ol>\n

      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,<\/p>\n

        \n
      1. \n

        Development of the Nation<\/h3>\n<\/li>\n<\/ol>\n

        With a significant portion of India\u2019s population living in villages, Mahatma Gandhi\u2019s idea that the country\u2019s 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\u00a0grow their businesses that in future create jobs in within their communities. The local economic contributes significantly to the overall development of the nation.<\/p>\n

        How to Set Up a Microfinance Company in India?<\/h2>\n

        In India, Microfinance companies can be set up in two ways:<\/p>\n

          \n
        1. Non-Banking Finance Companies (NBFCs) that are officially registered with the RBI.<\/li>\n
        2. Under section 8 of the Companies Act, 2013<\/li>\n<\/ol>\n

          Non-Banking Finance Companies (NBFCs) that are officially registered with the RBI:<\/h3>\n

          Non-Banking Finance Companies (NBFCs)<\/a> 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:<\/p>\n

            \n
          1. The company must have a minimum NOF of \u20b95 crore (\u20b92 crore for NBFC-MFIs registered in the North Eastern states of India).<\/li>\n
          2. The company have to be a public or private limited company<\/a> registered under the Companies Act 2013.<\/li>\n
          3. At least 85% of the company’s net assets should be in the form of microfinance loans with amounts not exceeding \u20b91.25 lakh in rural areas and \u20b92 lakh in urban areas.<\/li>\n<\/ol>\n

            Registering with the Ministry of Corporate Affairs (MCA)<\/h4>\n

            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.<\/p>\n

            Documents Required:<\/h4>\n
              \n
            1. \u00a0Incorporation Certificate<\/li>\n
            2. Memorandum of Association (MoA) and Articles of Association (AoA)<\/a><\/li>\n
            3. Board Resolution<\/li>\n
            4. KYC Documents of Directors and Shareholders<\/li>\n
            5. Credit Report of Directors<\/li>\n
            6. Net Owned Fund (NOF) Certificate<\/li>\n
            7. Audited Financial Statements<\/li>\n
            8. Report\u00a0 of Banks<\/li>\n
            9. Income Tax Returns<\/a> (ITRs)<\/li>\n
            10. No Lien Certificate<\/li>\n
            11. \u00a0Declaration of Directors<\/li>\n<\/ol>\n

              Filing the Application with the RBI:<\/h2>\n

              STEP 1:<\/strong> \u00a0Online Filing<\/p>\n

              Submit the online application through the COSMOS portal\u00a0<\/a>on the RBI’s official website. After submission, the system will generate a Company Application Reference Number (CARN)<\/span>.<\/p>\n

              STEP 2:\u00a0<\/strong> Submitting Physical Documents<\/p>\n

              Within 30 days of filing the application online, the physical copy of the application has to be\u00a0submitted to the regional office of RBI,<\/p>\n

              STEP 3:<\/strong> Background Check<\/p>\n

              Once the documents are submitted physically, the RBI begins a\u00a0background 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.<\/p>\n

              Certificate of Registration (CoR)<\/h3>\n

              If the RBI approves the application and the due diligence checks, a\u00a0Certificate of Registration (CoR) will be issued by RBI that will grant the company the status of an NBFC-MFI.<\/p>\n

              Compliance with RBI Guidelines<\/h3>\n

              After receiving the CoR, NBFC-MFI is mandated to \u00a0comply with the ongoing regulations and guidelines set by the RBI:<\/p>\n

                \n
              1. Complying with the interest rate caps prescribed by the RBI to prevent overcharging borrowers.<\/li>\n
              2. Implementing a transparent and fair practices code for dealing with customers.<\/li>\n
              3. Regularly file financial returns, balance sheets, and other required documents with the RBI.<\/li>\n<\/ol>\n

                Registration under Section 8 of the Companies Act, 2013<\/h3>\n

                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 \u20b950,000 to small businesses and loans up to \u20b91.25 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.<\/p>\n

                Important Documents<\/h4>\n
                  \n
                1. Identity and address proofs of the directors\/promoters of the company<\/li>\n
                2. PAN Card copies of directors\/promoters of the company<\/li>\n
                3. Photographs of directors\/promoters of the company<\/li>\n
                4. Proof of registered office of the company or rental agreement<\/li>\n
                5. NOC from the property owner in case the registered office is taken on rent<\/li>\n
                6. State-mandated stamp duty<\/li>\n<\/ol>\n

                  Process<\/h4>\n

                  Step 1: Obtain DSC and DIN<\/strong>
                  \nEvery 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.<\/p>\n

                  Step 2: Name Approval<\/strong>
                  \nAll 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.<\/p>\n

                  Step 3: Filing MoA and AoA<\/strong>
                  \nCompanies 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.<\/p>\n

                  Step 4: Submitting Section 8 Incorporation Forms<\/strong>
                  \nOnce you get the green light for your company name, it\u2019s time to file some key forms with the Ministry of Corporate Affairs (MCA). You’ll need to prepare:<\/p>\n