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Microfinance Company Registration in India
Microfinance institutions (MFIs) play an important role in providing financial services to the underserved and economically weaker sections of society. These institutions focus on offering small loans to individuals who do not have access to traditional banking services. In India, where a large segment of the population remains unbanked or underbanked, microfinance has been a significant tool for financial inclusion. Setting up a microfinance company in India requires complying with specific regulations and obtaining appropriate licenses.
What is Microfinance?
Microfinance refers to the provision of small loans, savings, and insurance products to low-income individuals and communities. These services are provided to people who do not have access to traditional banking or credit services due to their lack of collateral, income history, or credit score. In India, microfinance institutions (MFIs) cater to rural populations, small entrepreneurs, and those in marginalized communities. These institutions aim to alleviate poverty, empower women, and contribute to the overall economic development by offering small loans (microcredit) to meet the needs of individuals for business, education, health, or housing.
Legal Structures for Microfinance Companies
- NBFC-Microfinance Institution (NBFC-MFI): An NBFC-MFI is a non-deposit-taking financial company registered under the Companies Act, 2013, and regulated by the Reserve Bank of India (RBI).
- Section 8 Company: A Section 8 Company is a non-profit organization formed under the Companies Act, 2013, to promote charitable activities, including microfinance. Unlike NBFC-MFIs, Section 8 Companies do not require RBI approval if they adhere to certain conditions.
Legal Framework Governing Microfinance Companies in India
In India, microfinance companies are governed by the following:
- Reserve Bank of India (RBI): The RBI regulates the operations of microfinance companies in India under the guidelines specified for Non-Banking Financial Companies (NBFCs).
- The Companies Act, 2013: Microfinance companies are registered as public or private limited companies under the Companies Act, 2013, which lays down the rules for the incorporation of a company in India.
- RBI's "Prudential Norms for Microfinance" (2011): The RBI laid out specific guidelines for microfinance operations in India. These norms focus on the limits for loans, interest rates, and the capital structure of MFIs.
- National Bank for Agriculture and Rural Development (NABARD): NABARD also plays a key role in India's microfinance sector by providing financial support to MFIs and acting as an apex body for their development and regulation.
Operational Scope of Microfinance Companies
- Loan Offering: Microfinance companies provide collateral-free loans to households with an annual income up to ₹3,00,000.
- Target Customer Segments: The primary beneficiaries are low-income households, particularly in rural and semi-urban areas. The focus is often on women, self-help groups (SHGs), and small entrepreneurs who lack access to traditional banking services.
- Loan Disbursement and Repayment: Loans are disbursed without requiring any collateral, and repayment schedules are provided.
- Interest Rates: Microfinance institutions are permitted to set interest rates on loans that are low.
Benefits of Microfinance Company Registration
- Financial Inclusion: By offering small loans to underserved individuals, you contribute to the country's financial inclusion efforts, helping lift people out of poverty.
- Entrepreneurship Promotion: Microfinance provides an opportunity for low-income individuals to start or expand small businesses, thereby creating jobs and stimulating local economies.
- Access to Capital: Registration as an NBFC-MFI provides access to funding from banks, investors, and government programs, enabling you to grow your business.
- Regulatory Support: The Reserve Bank of India (RBI) and other regulatory bodies have established frameworks to support the growth and stability of MFIs, providing guidelines that help maintain transparency and protect client interests.
- Social Impact: Beyond financial gains, registered MFIs contribute to social development by empowering women, supporting education, and fostering sustainable livelihoods through targeted financial services.
- Women's Empowerment: Many microfinance companies focus on lending loan to women, which helps them become financially independent and contribute to their families and communities.
Online Procedure for Micro Finance Company Registration
Choose the Type of Entity
The first step in setting up a microfinance company in India is deciding on the type of entity you wish to establish. You can choose from one of the following:
- Private Limited Company: Most microfinance companies are registered as private limited companies as they offer limited liability and are suitable for smaller operations.
- Non-Banking Financial Company (NBFC): Microfinance companies are often registered as NBFCs, which are financial institutions that provide services like loans, asset financing, and microfinance.
Registration of NBFC-Microfinance Institution (NBFC-MFI)
NBFC-MFIs are regulated by the Reserve Bank of India (RBI) and are profit-oriented.
Step 1: Incorporate a Private or Public Limited Company
Register a company under the Companies Act, 2013, either as a Private Limited or Public Limited entity. The incorporation process involves the following steps:
1. Obtaining Digital Signature Certificate (DSC):
- Digital signatures of proposed directors are mandatory for electronic filing.
- Apply for DSC through a certifying authority.
2. Acquiring a Director Identification Number (DIN) for the directors through the MCA portal.
3. Reserve the company name using the RUN (Reserve Unique Name) service on the MCA website.
4. File the incorporation Documents:
- File the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) form with the Registrar of Companies (RoC) along with necessary documents, including Memorandum and Articles of Association, identity and address proofs, and proof of office address.
- Pay the prescribed fees and obtain the Certificate of Incorporation.
Step 2: Raise the Minimum Net Owned Fund (NOF)
The RBI mandates that an NBFC-MFI must have a minimum Net Owned Fund of ₹5 crore; ₹2 crore for the northeastern region. The NOF must be maintained at all times, and the amount should be deposited as a fixed deposit in a bank.
Step 3: Apply for NBFC License:
File the Online Application:
- Access the RBI’s COSMOS portal and complete the application form.
- Upload necessary documents, including financial statements, business plan, KYC of directors, and proof of NOF.
Step 4: Submit Hard Copies of the online application along with the necessary documents to the RBI regional office.
Step 5: RBI Due Diligence and Verification:
- The RBI scrutinizes the application, verifies the documents, and may request additional information or clarification.
- The due diligence process also includes background checks of the promoters and directors.
Step 6: After verification, the RBI will issue a Certificate of Registration.
Registration of a Section 8 Company
A Section 8 Company is a non-profit organization formed under the Companies Act, 2013, with a primary objective of promoting charitable activities, including microfinance.
Step 1: Obtain the DSC and DIN for the directors
Step 2: Name Approval
Submit Form INC-1 on the MCA portal to reserve the company name. The name of the company must indicate that it is a company registered as a section 8 company, and the name must align with the objectives of the company.
Step 3: Draft the Memorandum and Articles of Association
Prepare the Memorandum and Articles of Association, which outline the organization's purpose and rules. Include details on the organization's non-profit nature and strict utilization of profits for the intended purposes.
Step 4: Applying for a Section 8 License
To apply for a Section 8 license, the following documents need to be submitted to the Regional Director along with Form INC-12:
- Draft Memorandum of Association (MOA) and Articles of Association (AOA).
- Financial projections for the next three years, including income and expenditure statements.
- Declarations by the directors on stamp paper affirm compliance with the Companies Act and non-profit objectives.
- Proof of registered office address (such as a rent agreement or utility bill).
- Estimated annual income and expenditure statement.
- List of promoters and directors, including their identity and address proofs (PAN card, Aadhaar, passport, etc.).
- An affidavit from each director declaring non-involvement in any criminal proceedings.
- No Objection Certificate (NOC) from the owner of the registered office premises.
- Statement of assets and liabilities.
- Board resolution authorizing the submission of the application.
- Detailed description of the microfinance activities to be undertaken.
- Consent letters from directors and promoters.
- Any other document as required by the Regional Director.
Step 5: Incorporation and Compliance
Once approved, complete the incorporation process through the ROC by submitting the necessary forms and documents. Upon successful registration, the company receives the Certificate of Incorporation and the Section 8 license.
Post-Registration Compliance Requirements for NBFC-MFIs and Section 8 Companies
|
Compliance Area |
NBFC-MFI |
Section 8 Company |
|
Regulatory Authority |
Reserve Bank of India (RBI) |
Ministry of Corporate Affairs (MCA) |
|
Asset Classification |
Classify assets as Standard, Sub-standard, Doubtful, or Loss based on overdue periods. |
Not applicable. |
|
Provisioning Norms |
Maintain provisions: 0.25% for standard assets; higher percentages for non-performing assets as per RBI norms. |
Not applicable. |
|
Interest Rate Cap |
Interest rates should not be usurious and must have a board-approved policy detailing the interest rate model and components. |
Not applicable. |
|
Loan Repayment Obligations |
Total loan repayments of a household should not exceed 50% of the household's monthly income. |
Not applicable. |
|
Annual Financial Statements |
Prepare and file audited financial statements annually with the RBI. |
File Form AOC-4 with MCA within 30 days of AGM. |
|
Annual Returns |
Submit annual returns and other periodic returns as specified by the RBI. |
File Form MGT-7 with MCA within 60 days of AGM. |
|
Statutory Audit |
Conduct an annual audit by a qualified auditor; submit the auditor's report to the RBI. |
Mandatory annual audit by a Chartered Accountant; report filed with MCA. |
|
Board Meetings |
Hold board meetings as per RBI guidelines; maintain minutes. |
Minimum of two board meetings per year; maintain minutes. |
|
Annual General Meeting (AGM) |
Not mandatory unless specified by the RBI. |
Mandatory to hold AGM within six months of the financial year-end. |
|
Tax Compliance |
File income tax returns; comply with applicable TDS and GST regulations. |
File ITR-7 annually; comply with TDS and GST regulations as applicable. |
|
Statutory Registers |
Maintain registers as per RBI requirements. |
Maintain registers of members, directors, and other statutory records. |
|
Event-Based Filings |
Report changes in directors, registered office, etc., to the RBI promptly. |
File necessary forms (e.g., DIR-12, INC-22) with MCA for changes in directors, registered office, etc. |
|
CSR Compliance |
Not applicable unless specified. |
Comply with CSR provisions if applicable under Section 135 of the Companies Act, 2013. |
|
Foreign Contributions |
Comply with FEMA regulations for foreign investments. |
Obtain FCRA registration to receive foreign contributions; file annual returns with the Ministry of Home Affairs. |
Why Choose Kanakkupillai for Your Microfinance Company Registration?
Starting a microfinance company involves going through complex regulations, paperwork, and compliance requirements. Kanakkupillai takes care of every step with precision and clarity. We provide:
1. Expertise in NBFC-MFI and Section 8 Company Registration: Whether you are setting up an NBFC-Microfinance Institution (NBFC-MFI) or a Section 8 Company, our team of experts will guide you through every legal and procedural step. We ensure that your MoA/AoA, Trust Deed, and other necessary documents comply with both central and state regulations.
2. Post-Registration Compliance Support: Registration is just the beginning. We assist with:
- Annual Returns and Financial Statements filing with the RBI and MCA
- Statutory Audits by certified professionals
- Board Meeting Scheduling and maintenance of minutes
- Ongoing Compliance Monitoring, including interest rate caps and loan repayment norms
This comprehensive support ensures your microfinance company stays compliant year-round.
3. Post-Registration Compliance Support: There are no hidden charges! We provide a clear breakdown of fees at every stage so you know exactly what to expect.
4. Dedicated Support Team: Our team of professionals is available to answer your questions and resolve your doubts to ensure a smooth and stress-free registration process.
Frequently Asked Questions
What is a Microfinance Company?
A Microfinance Company provides small loans, savings, and other financial services to low-income individuals who typically do not have access to traditional banking services.What are the requirements for registering an NBFC-MFI in India?
To register an NBFC-MFI, you need to: Incorporate a company under the Companies Act, 2013. Raise a minimum Net Owned Fund (NOF) of ₹5 crore (₹2 crore for the northeastern region). Obtain an NBFC license from the Reserve Bank of India (RBI).How does a Section 8 Company differ from an NBFC-MFI?
A Section 8 Company is a non-profit organization that promotes charitable activities, including microfinance. Unlike NBFC-MFIs, it does not aim to make a profit and does not require RBI approval if it adheres to the conditions specified under the Companies Act, 2013.What types of loans do microfinance companies offer?
Microfinance companies primarily offer collateral-free, small-ticket loans to low-income households for purposes such as business development, education, housing, and medical needs.Are there any restrictions on the interest rates charged by microfinance companies?
Yes, microfinance institutions must adhere to RBI guidelines, which mandate transparent and reasonable interest rates. The rates should not be usurious and must be disclosed upfront to borrowers.Who can benefit from microfinance loans?
Microfinance loans primarily benefit low-income households, rural entrepreneurs, women, self-help groups (SHGs), and small business owners who do not have access to traditional banking services.Can microfinance companies charge penalties for early loan repayment?
No, RBI guidelines strictly prohibit microfinance companies from charging pre-payment penalties. Any penalty for delayed payments should only apply to the overdue amount, not the entire loan.What are the post-registration compliance requirements for microfinance companies?
Registered microfinance companies must: File annual returns with the RBI or MCA. Conduct annual audits by qualified auditors. Comply with the loan repayment and interest rate guidelines set by the RBI. Maintain transparent financial records and customer data.What makes Us Different
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