A microfinance company registration, often referred to as a Microfinance Institution (MFI), extends an array of financial services to small-scale enterprises with limited income. These services encompass credit facilities, deposit options, and insurance provisions. NABARD, or the National Bank for Agriculture and Rural Development, defines an MFI as an entity that provides small-scale financial services and products to low-income businesses in rural, semi-urban, and urban areas, catering to their specific financial needs. Notably, only Non-banking Finance Companies (NBFCs) can operate as Microfinance Companies, subject to prior approval from the Reserve Bank of India (RBI).
Setting Up a Microfinance Company: Vital Checks :-
Prior to initiating the formation process, there are crucial prerequisites that must be met. Here’s a detailed checklist to ensure all necessary conditions are satisfied:
- For a Private Limited company: A minimum of two members; For a Public Limited company: At least seven members
- Private Limited and Section 8 companies require a minimum of two directors; Public Limited companies necessitate a minimum of three directors
- At least one director must be a resident of India
- A distinctive and valid company name
- A specified amount of capital investment
Step-by-Step Process for Microfinance Company Registration :-
To establish an MFI as an NBFC, obtaining RBI approval is mandatory. The following steps outline the procedure:
Step 1: Documentation
Submit an application in the prescribed format, accompanied by a range of essential documents. Any omission of these documents may lead to application rejection.
Step 2: Incorporate Your Company
Choose between Public and Private Limited Company incorporation. This selection should align with the company’s specific needs.
Step 3: Ensure Capital Adequacy
Ensure the company possesses the requisite capital before applying for RBI approval. The net owned funds must be a minimum of Rs. 5 crores (with a reduced limit of Rs. 2 crores for North Eastern states).
Step 4: Deposit Capital
Once Rs. 5 crores are secured, deposit this amount into a fixed deposit account in a scheduled commercial bank. Obtain a No Lien Certificate from the bank.
Step 5: Apply for RBI License Digitally
Download the RBI license application from the official website, complete it manually, and submit the scanned application along with necessary documents.
Step 6: Submit Application to RBI Regional Office
Submit a copy of the application, application reference number, and required documents to the Regional Office of the RBI. Following verification, the application is forwarded to the Central Office.
Step 7: Issuance of RBI License
Within days of application, the RBI issues the license, allowing the NBFC to commence operations as a microfinance company.
Essential Documents for Section 8 Micro Finance Company Registration :-
Documentation is pivotal in the MFI registration process. To establish an MFI as an NBFC, obtain RBI approval by submitting the following documents with the application:
- Memorandum of Association and Articles of Association
- Certificate of Incorporation
- Certified True Copy of Board resolution
- Auditor’s Certificate on Net Owned Fund
- Banker’s Certificate of No Lien on Fixed Deposit
- Banker’s report about the company
- CIBIL Credit Report of the directors
- CA Certified Net worth certificate of the directors
- Education Proof of the Director
- Directors Professional Qualification Proof
- Photo, Identity & Address Proof of Directors
- Income Proof of the director
- Relevant work experience in the financial sector
- Organization Structure Plan
For more detailed information, please visit our official page on company registration in India.
Frequently Asked Questions About Microfinance Company Registration :-
1. Which authority regulates Microfinance companies in India?
Microfinance companies, like all other financial institutions in India, are subject to regulation by the Reserve Bank, commonly known as the RBI.
2. Do Microfinance companies operate as for profit or not for profit entities?
Microfinance companies function as for-profit entities when registered as an NBFC. Prior to 2022, even non-profit organizations under Section 8 of the Companies Act could establish themselves as an MFI. However, this avenue has been discontinued as per a recent notification from the Ministry of Corporate Affairs.
3. Is RBI license mandatory for setting up an MFI?
Yes. RBI license is mandatory for setting up an MFI as an NBFC.
4. Can MFIs accept monetary deposits from the public?
Negative. MFIs are prohibited from accepting deposits from the general public.
5. What is the minimum prescribed capital for microfinance companies?
Microfinance institutions registered as Non-Banking Financial Companies (NBFCs) must ensure a minimum capital of Rs.5 crores prior to their establishment.
6. Should directors of an MFI necessarily have a background of work in the finance sector?
Directors of microfinance companies registered as NBFC must possess a minimum of 10 years of prior experience in the finance industry before assuming their roles.
7. What are the restrictions on loan disbursement by Microfinance companies?
Microfinance institutions registered as NBFCs are restricted from disbursing loans exceeding 10% of their total assets.
8. What is the system of recovery in a microfinance company?
The recovery process in an MFI should be non-coercive, adhering to a centralized system. In case of non-repayment within the stipulated timeframe, authorized recovery personnel have the authority to collect the outstanding amount from the borrower.
9. What does the term "Net Assets" mean in the context of a Microfinance company?
Net assets represent the total assets currently held by a corporation.
10. What is a No Lien Certificate issued by the banker?
Banks possess the authority to exercise a lien on securities or money that has been deposited with them. This implies that the bank can retain the deposited securities/money until any outstanding amounts owed by the depositor are settled. However, if no outstanding amount is due from the depositor, or if the deposited amount serves a specific purpose, the bankers hold no lien. Consequently, after the capital of the MFIs is deposited into the FD account of the MFI, it is imperative to acquire a no lien certificate to proceed with the MFI-NBFC formation process.
11. What are “Qualifying Assets” in the context of a Microfinance company?
Qualifying assets are those that require a significant amount of time to become fully functional. Assets that are immediately ready for their intended use upon acquisition do not fall under the category of 'Qualifying Assets'. An MFI-NBFC is mandated to uphold 85% of its overall assets as Qualifying Assets.
12. What are the distinct characteristic features of microfinance loans?
Microfinance loans are characterized by the following distinctive features:
- Small loan amounts
- Shorter repayment periods
- No need for collateral
- Typically, loans are extended to groups rather than individuals
- The transaction costs associated with lending are notably low
13. Can microfinance loans be obtained for specific purposes only?
No. The purpose of end use of microfinance loans may be flexible.
14. What does the banker’s report about the company contain?
The banker's report for an MFI-NBFC provides information about the applicant company's interactions with the respective bank, whether as a depositor or a lender.
15. Can the donors in a microfinance company claim tax exemptions?
Contributions made to MFIs may qualify for exemptions under Sections 12A and 80G of the Income Tax Act, 1961.