Overview microfinance company registration

India is a developing economy in the world with a great population. But according to a fact it is known that only 20% of the total population has access to bank loans due to lack of awareness or education among the rural peoples and the banks are not willing to open their branches in rural areas. And out of this 20% only 8% of people are eligible for bank loans due to the strict measures put up by banks for loan eligibility. Thus, depriving a large part of the population to enjoy the benefits of credit facilities.

To overcome these problems the government of India along with RBI has introduced the concept of a microfinance company. The main objective of these organizations was to provide easy access to short-term credit facilities to that segment of society that is unable to meet the strict banking criteria or had no access to banking channels.

What is a microfinance company?

As the name suggests a microfinance company is an entity that provides financial support to lower-income groups and other backward groups in rural and urban areas. These institutions provide loans to people who are unable to borrow money from mainstream banks.

There are 2 types of microfinance companies in India

1. Non-Banking finance company (NBFC) : These companies are registered with RBI. They can provide small loans of Rs 50,000 to people in rural areas and up to RS 1,25,000 in urban areas. It also requires a minimum net owned funds of Rs.5 crores.

2. Section 8 company : This type of company is not required to register with RBI and doesn’t require any minimum net-owned funds.

Objectives of a microfinance company

The main objectives of microfinance banks are

• To provide collateral-free loans to small entities
• Encourages women in generating sustainable livelihood
• Offers an opportunity to low income groups to become self-employed
• Generates job opportunities
• Offers loan at a better repayment rate

Features of a microfinance company

1. Separate legal entity

Like any other company, microfinance companies have a separate legal identity. The liability of the directors and shareholders is limited only to the shares held by them.

2. Lesser compliance

Microfinance companies have to comply with RBI standards even if it is not registered with RBI.

3. No RBI approval

As fewer compliances are to be followed, there is not required to take approval from RBI for registration

4. Higher interest rates

Microfinance companies usually charge higher interest rates up to 25%

No minimum capital requirement

There is no minimum paid-up capital requirement for the registration of microfinance companies section-8.

Encourages entrepreneurship

It aims to help the poor and employed people to become self-reliant by providing loans at better repayment rates.

Upliftment of weaker sections

Microfinance companies provide short-term credits to lower-income groups usually in rural areas to people having no access to banks.

Documents required for microfinance company registration

• Copy of PAN card for all directors and shareholders
• ID proof (Aadhar card, voter ID, or driving license) of all directors and shareholders
• Passport sized photographs of all directors and members
• Utility bills (electricity bill or telephone bill) of the registered office place
• Rent agreement and NOC from the landlord
• Sale deed in case the property is owned
• Banker’s report
• bankers certificate of no lien
• Memorandum of association (MoA) and article of association (AoA)
• Incorporation certificate of the company
• Certified copy of board resolution
• Compliance certificate from a chartered accountant
• Latest financial report of the proposed directors
• Net worth of directors
• Educational qualifications of directors

Eligibility criteria for microfinance company registration

• The company must register under the company’s act, 2013
• Should have minimum net owned funds of Rs.5 crores and Rs. 2 crores in northeastern states
• 85% of the total net owned funds must be qualifying assets
• Can provide loans only between 50,000 to 1,25,000 for business entities and dwelling unit respectively
• They should furnish details to promoters

Procedure for Microfinance company registration

Procedure for Microfinance company registration

Register a company

The first step to obtaining a microfinance registration is to register as a company under the provisions of the company’s act 2013. For this purpose, the applicant should fill the SPICe+ form. Initially when the company is incorporated the best type of business structure which is used for this organization would be Pvt ltd company or public ltd company.

Gather the required capital

In the next step, the applicant is required to raise the minimum net owned funds (NOF) of Rs 5 crores. The net owned capital requirement for north-eastern states is Rs 2 crores. Upon northeastern collection of funds, the applicant has to deposit the funds in a bank as a fixed deposit and obtain a ‘No lien’ certificate.

Apply to RBI for microfinance company registration

Now the applicant must apply for an online application for NBFC and submit it along with the required documents. The documents required for this purpose are

• Memorandum of association and article of association
• Banker’s certificate
• Banker report
• Incorporation certificate
• Receipt of fixed deposit

Now the applicant has to file an online application with the reserve bank of India. The RBI will then issue an application reference number for the submitted application

Furnish the hard copy

Finally, the applicant has to submit the hard copy of the registration form at the regional office of the reserve bank of India. After submission of the form, the authorities will carry out the procedure of scrutiny and due diligence to confirm the company has fulfilled all the requirements and will issue a certificate of commencement.