MFI as NBFC: How to Establish a Micro Finance Institution as NBFC?

A Micro Finance Institution can be established as an NBFC (Non-Banking Financial Company). There are certain necessities that should be fulfilled for setting up the MFIs as NBFC. There are some vital documents also that should be submitted. In this write-up, we shall discuss the complete process of establishing an MFI as NBFC.

What is NBFC?

An NBFC or Non-Banking Financial Company is a financial company incorporated under the Companies Act, 2013^[1], involved in the business of advances & loans, stock, bonds, acquisition of shares, hire-purchase insurance business or chi-funds business; however, it doesn’t comprise any institution whose principal business is that of agriculture, industrial doings, sale/purchase of any products (other than securities) or offering any services and purchase/sale/construction of the immovable property. As per the Provisions of the Companies Act, 2013 & RBI Act, 1934 NBFC Registration is obtain. It plays an essential role in implementing the fiscal functions of our economy.

The operations & working of Non-Banking Financial Companies are controlled by the RBI within the structure of the RBI (Reserve Bank of India) Act, 1934. As banks are not available in every corner of financial business requirements in India, NBFCs play an essential role in the Indian Economy’s financial sector. That’s why for the past few years, in Indian Economy is going down due to the falling down of financial entities in India.

What is the Meaning of Micro Finance and Micro Finance Institutions?

According to the NABARD (National Bank for Agriculture and Rural Development), Microfinance means the provision of thrift, credit and other financial services & products of a small amount to the poor in the rural, urban & semi-urban areas provided to the consumers to fulfil their financial requirements. The qualification for the same is that the value of transactions is small, and clients are indigent. However, a Micro Finance Institution mentions an organisation that delivers financial services to low-income people & provides loans to their members & many provide a deposit, insurance, and other services. Hence, the organisations that finance on a vast scale are called Microfinance Institutions. They offer credit and other financial services to the representatives of the poor class of the population.

Essential Documents for Establishing MFI as NBFC

Following is the list of all the vital documents required at the time of establishing MFI as NBFC:

1. Certified copies of Registration Certificate;
2. Certified copies of extract of the primary object clause as offered in the MOA (Memorandum of Association);
3. Copy of the Board Resolution expressing that:

• The company or entity is not operating any NBFC activity or will not do it unless a Certificate of Registration (COR) is obtained;
• That the company has not receiving any public deposits and if it accepts in future then will looking for the consent from the Reserve Bank of India (RBI);
• The company has constructed Fair Practices Code as per the guidelines of the RBI;
• The company would be a member of credit information entities and would be a member of at least one self-regulatory organisation;
• The company shall follow the regulations of credit pricing, fair practices in lending & non-coercive method of recovery as per the RBI guidelines;
• The company has set internal exposure limits;
• The company is not authorised under Section 25 of the Companies Act 1956 or Section 8 of the Companies Act, 2013;
• Submit a copy of receipts of fixed deposit and banker’s no lien certificate showing balances in support of NOF (Net Owned Fund);
• In the case of entities already in existence, audited balance sheet and P&L Account with directors and report of auditor;
• Copy of the certificate of the education & professional qualification concerning directors;
• Copy of the experience certificate, if any, in the sector of financial services;
• Report of Banker;
• Roadmap for getting 85% qualifying assets.

Registration of MFI as NBFC

Following is the way of registration of MFI as NBFC:

1. A company should be registered under the Companies Act, whether private or public;
2. Open a bank account in the name of such a company after the registration and maintain Net Owned Fund up to Rs. five crores in the form of share capital or Rs. two crores in case of NE states;
3. A Micro Finance Institutions are governed by the Reserve Bank of India; the same has to be incorporated with the Reserve Bank of India after Registration;
4. The submit all the documents as mentioned above;
5. Then, submit an application online by downloading it from the Reserve Bank of India website and fill the application & submit the same with all the relevant documents for the verification and registration process. Once it is uploaded, a company application reference number will be provided;
6.  Submit the printout copy of the application to the regional office of the reserve bank with the Company Application Number & supporting documents;
7. The ending steps involve coordinating with the reserve bank on a timely basis & fulfil all instructions. Then the Reserve Bank of India will issue the COR (Certificate of Registration).

It is worth introducing here that the process delivered here is detailed according to the same provided under the Reserve Bank of India Act and its rules that govern the MFIs (Micro Finance Institutions). Hence, readers should visit the website or Act to remain updated will all the information & formalities regarding the Registration of MFIs.

Conclusion

A Micro Finance Institutions (MFI) can be established as an NBFC. The necessities provide above must be met for establishing MFI as NBFC. In the case of any question, you must take the help of a professional in this regard.

Read our article:Buying and Selling of NBFCs in India – An Overview