How to Start a Microfinance Company Registration

registrtion process
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Overview of Micro Finance Company Registration

The Microfinance Company means a company that offers financial assistance to the low income strata, rural people, and backward section of the society. In other words, we can state that a Microfinance Company assists those who do not have access to banking facilities.

Further, it shall be noteworthy to state that a Microfinance Company or Microfinance Institution is a Non-Deposit Taking NBFC and is different from a Section 8 Company. The operations and management of an MFI are governed by the provisions of the RBI Act 1934 and guidelines issued there under.

Role of Microfinance Company

The key role of a Microfinance Company can be summarised as:

  • Offers Financial Assistance to Low Income People;
  • Provides Banking Facilities to Rural, Semi Rural, Backward Section of Society;

Benefits of Microfinance Company Registration

The key benefits of Microfinance Company are as follows:

Benefits of Microfinance Company Registration
  • Does not require Collateral for Lending Funds;
  • Facilitates Employment Generation;
  • Assists in Rural Development;
  • Provides Opportunity to Earn Income;
  • No Minimum Capital Requirements;
  • Offers better Rate of Repayment;
  • Make people Self Sufficient;

Who are Eligible to Obtain a Loan from MFI

The ones eligible to obtain a loan from MFI are as follows:

  • Agricultural Activities;
  • Small Scale Businesses;
  • Professional and Transport Trade;
  • Artisan Business;

Requirements of Microfinance Institution Registration

The basic requirements to start a Microfinance Institution in India are as follows:

  • Must have registration under the Companies Act 2013 or Companies Act 1956;
  • Should have Net owned funds of Rs 5 crores;
  • Can provide loans only between Rs 50 thousand to Rs 1.25 lakh;
  • Must furnish details on Promoters;
  • Out of the total Net Owned Funds, 85% must be the Qualifying Assets;
  • No Minimum Capital Requirement;

Types of Microfinance Institutions

The different types of Microfinance Institution are as follows:

Types of Microfinance Institutions

RBI Registered Microfinance Institutions

To register a Microfinance Company as an NBFC, the applicant needs to incorporate a Private Limited or Public Limited Company under the provisions of the Companies Act 2013. After that, he/ she needs to follow all the steps required for a microfinance company registration, ranging from the minimum capital requirement to the filing of the application at the regional office of the RBI.

Section 8 Registered Microfinance Institutions

To register a Microfinance Company as a section 8 company, the applicant company needs to first apply for DSC (Digital Signature Certificate) and DIN (Directors Identification Number) for all the proposed directors. After that, it needs to file an application for Name Approval in form INC – 1. Further, it need to draft the Memorandum of Association and Articles of Association for the company and need to file INC – 12, together with the required documents to acquire license.

Mandatory Compliance for Microfinance Institution

The mandatory compliance for Microfinance Institution are as follows:

RBI Compliance

The term RBI Compliance means the guidelines issued for the operating Microfinance Companies. It shall be relevant to state that there is no need for a Microfinance Company to satisfy the RBI requirements, but it needs to adhere to the RBI Rules concerning it.

Companies Act 2013

If in case a Microfinance Company is registered as a Section 8 Company, then, in that case, it needs to comply with the requirements specified under the Companies Act 2013.

Documents required for Microfinance Company Registration

The documents required to obtain the Microfinance Company Registration in India are as follows:

  • A copy of the Company’s Incorporation Certificate;
  • PAN (Permanent Account Number) Card of the Applicant Company;
  • PAN Card of the Directors;
  • DSC (Digital Signature Certificates) for Directors;
  • DIN (Director Identification Number) for Directors;
  • Latest Passport-sized photographs for all Directors;
  • Address Proof for the place being used as the Registered Office;
  • A copy of the Rental Agreement or Lease Deed, in the case of Rented Property;
  • A copy of the Ownership or Sale Deed, in the case of Self Owned Property;
  • Certified copy of the MOA (Memorandum of Association);
  • Certified copy of the AOA (Articles of Association);
  • Banker’s Report;
  • A copy of the BR (Board Resolution) passed;
  • Auditors Report showing the minimum Net Owned Funds;
  • Compliance Certificate from a Chartered Accountant;
  • Structured Business Plan of the Entity;
  • Financial Report pertaining to Directors;
  • Income Proof of the KMP (Key Managerial Personnel) and Directors;

Procedure for Microfinance Company Registration

The steps involved in the process to obtain Microfinance Company Registration are as follows:

Procedure for Microfinance Company Registration

Register a Company

In the first step of the procedure to obtain Microfinance Company Registration, the applicant requires to get a company registered under the Companies Act 2013. Further, the term company includes both Public Limited Company and Private Limited Company.

Also, it will be relevant to state that the Ministry of Corporate Affairs has removed the requirement of having Rs. 1 lakh as the Minimum Capital.

Gather the Required Authorised Capital

In the next step of the procedure, the applicant requires to raise the NOF (Net Owned Funds) of Rs 5 crores or Rs 2 crores (in the case of north eastern state). Such an NOF will be considered as the authorised capital.

However, it shall be considerate to state that the said authorised capital can only be raised through issuing Equity Shares and not by issuing Preference Share Capital.

Open a Bank Account

The applicant requires to open a bank account with any scheduled bank for making an FD (Fixed Deposit). The amount of the FD will be the one received by issuing equity shares.

After that, the concerned scheduled bank will grant a “Certificate of No Lien” to the applicant, which it requires to annex with the application form, to submit the same with the Apex Bank, i.e., Reserve Bank of India.

Apply for Microfinance Company Registration

To obtain the Microfinance Company registration, the applicant needs to furnish the certified copies of the following with the RBI:

  • Certificate of Incorporation;
  • Extract of the Object Clause as specified in MOA;
  • Fixed Deposit Receipt;
  • Banker’s Certificate;
  • Banker’s Report;

File Online Application for Registration

To obtain Microfinance Company Registration, the applicant must file an online application for the same with the RBI. The apex bank will issue an ARN (Application Reference Number) against the form submitted.

Furnish the Hard Copy

In the last step, the applicant will require to visit the Regional Office of the RBI to submit the Hard Copy of the Registration Form.

After the submission of the form, the authorities designated by the Apex Bank will carry out the procedure of Due Diligence. If the authorities are satisfied with the documents and form submitted, they will issue a Certificate of Commencement (COC) to the applicant.  

Once the applicant has received the Certificate of Commencement, it can start carrying out the functions of a Microfinance Institution.

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FAQs of Micro Finance Company Registration

The term “Microfinance Company” denotes a company that facilitates low income group which are distantly located especially in semi urban as well as rural areas and have no access to banking facilities by providing funds to them.

The main aim of a Microfinance Company is to offer funds to low income people and comes handy for those people who reside in semi urban as well as rural areas.

The key benefits of a Microfinance Company are, it generates employment, facilitates rural development, no need of providing Collateral Security while obtaining a loan.

The term “pre-requisites” include a copy of the Incorporation Certificate, a copy of the Extract of Main Object Clause specified in MOA, a Copy of the Fixed Deposit Receipt, and Banker’s Certificate with respect to NOF and Banker’s Report.

A Microfinance Institution can lend up to Rs 50000 in the first cycle and Rs 1 lakh in the subsequent cycle to people who do not have normal banking facilities.

Normally, the people from low income strata benefit from a Microfinance Company, such as agriculturists, farmers, businessman, etc.

Any borrower who is having a Total Annual Income up to Rs 1.6 lakh in urban and semi-urban areas or Rs 1 lakh in rural areas.

The Minimum Loan Tenure for the Money Borrowed from MFIs is 24 months.

A Micro Finance Company is not eligible to impose more than 1% of the total loan amount as Loan Processing Charge.

A Micro Finance Company is not eligible to levy a high rate of interest than the prescribed limit from its lender. Further, the variation between the two should not exceed 4%.

Yes, a Micro Finance Company can give loans for personal use.

An MFI cannot grant more than 30% of the total loan as loan for personal use.

Yes, it is compulsory for a Micro Finance Institution to become a member of CIBIL.

The steps involved in the process to register a Micro Finance Company are, file an application for Name Approval, Apply for DIN and DSC, Incorporation Certificate, and an Online Application to RBI.

The term “Document” includes a copy of PAN Card, Aadhar Card, Address Proof, Passport Size Photo, Proof of Ownership, Utility Bill, and NOC.

Rs 1190000 is charged as the starting Registration Fee for a Micro Finance Company.

No, a Microfinance Company cannot levy Prepayment Penalty.

Yes, a Microfinance Company can give loans for emergencies.

An MFI cannot grant more than 50% of the total loan as a loan for an emergency.

The term “Net Assets” denotes the Total Assets other than money market devices and cash and bank balances.

The term “Qualifying Assets” denotes the loans disbursed to a borrower who is having an annual household income below Rs1,60,000 in urban and semi-urban areas or Rs 1,00,000 in rural regions.

No, there are no limitations imposed on the remaining 15% of the assets that an MFI holds.

The components considered for calculation are Expenses incurred towards interest payment + Processing Fees + Stamp Duty Charges + DD Charges – Interest Accrued on Security Deposit.

Yes, an NBFC-MFI is allowed to charge a differential rate of interest to its borrowers. However, the variance must not increase by 4%.

It is mandatory for all the NBFC-MFIs to maintain a “Capital Adequacy Ratio” inclusive of Tier I and Tier II Capital. However, the same shall not be below 15% of its aggregate risk weighted assets.

The total value of “Tier II Capital” at any point of time will not exceed 100% of the “Tier I Capital”.

No, the “Credit Concentration Norms” are not applicable to NBFC-MFI.

The term SRO stands for Self-Regulatory Organisation.

No, it is not necessary for an NBFC-MFI to become a member of an SRO. However, it is advisable to become a member of at least one Self-Regulatory Organisation.

The RBI or Reserve Bank of India has made it compulsory for the NBFC-MFI to clearly display in all of its offices and in the directions issued by it and on its official website, the “Effective Rate of Interest” being charged by it.

No, the pricing regulation, including the variance norms, do not apply to the Non-Qualifying Assets.

A borrower needs to pay only three charges for the pricing of loans, which are Interest Charge, Processing Charge, and Insurance Premium.

No, a Micro Finance Institution cannot charge any other component, except the three prescribed for determining the Pricing of Loan.

The Reserve Bank of India or RBI has the authority to regulate and issue directions for the Micro Finance Institutions in India.

Yes, MFIs or Micro Finance Institutions charge more interest than traditional banks.

The reasons are that an MFI offers small and collateral free loan, so it requires intensive assessment for determining the credit worthiness of the client. Moreover, a small loan tends to be expensive in terms of the process than large ones.

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