Registering Micro Finance Company

Microfinance companies in India act as a cluster of banking services to help meet financial requirements for low-income people. The financial services include insurance, loans, money transfer, savings and remittances that are offered to low-income group individuals.

Objectives

To give an opportunity to people in the low-income group to become self-sufficient
Offer banking services at small monetary amounts
To provide financial assistance to individuals who work in varied trades like transportation, fishing, carpentry etc.
Offer financial assistance to small enterprises that can not afford any collaterals
Increase the participation of women in generating sustainable livelihood
Provide access to quality healthcare
Increase and enrich the mode of livelihood for low-income individuals and creating opportunities for self-employment

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Roles of Microfinance Company

Microfinance is about lending funds to individuals who do not have access to capital. It allows individuals to become financially stable and work towards building a better lifestyle. The following sectors can avail Microfinance solution to improve and increase production:

Small Business
Artisans
Transport and Professional Trades
Agriculture and Allied Activities

Funding for Sustainable Livelihood

Microfinance creates opportunities for underprivileged to become entrepreneurs and can improve the standard of living. Opportunities for initiating business are more flexible as most of the microfinance companies offer loans without any collateral. The MFI helps the following member to improve livelihood:

Villagers
Micro entrepreneurs
Indigent women
Poor families and
Economically-marginalised populations

Better Loan Repayment Rate

Since the interest rate for these loans is lower as compared with the traditional lenders, defaulting the loan is a rare occurrence. Hence, for many underprivileged, microloan acts as a logical choice to eliminate poverty.

Provides an Opportunity Savings, Future Investment and Educate Children

Due to the increased state of poverty, education is avoided due to the costs associated with it. By receiving microloan, the livelihood becomes more stable and their option of savings increases. Through savings, the individuals can create an opportunity for future investment, better education and health care.

Generates Job Opportunities

Microfinance helps individuals to create business leading for job opportunities. Increased labour helps the individual for better productivity and stable income.

Starting a Microfinance Company

Micro Finance companies are of two forms, they are:

Micro Finance Institutions registered with RBI
Section 8 Company

MFI Registered with RBI

MFI registered with RBI shall operate under Section 25 of the Indian Companies Act, 1956. The new registered MFIs should have a minimum net owned funds of Rs.5 crores.

Eligibility to Register

One of the directors should have an experience of more than ten years in financial services
Minimum Funds of Rs.5 crore and Rs.2 crore for registered in North-Eastern states
Cannot accept security deposits
It should have a CIBIL membership and Credit Information Companies membership
It has to be a member of one of the self-regulatory organisations in the country
Should not extend loans to microfinance sectors more than 10% of the total assets

Loan Process

The first cycle of the loan shall be Rs.60,000, and the subsequent borrowing can be Rs.1 lakh
Loans will be extended to those having an annual income less than Rs.1 lakh for rural areas and Rs.1,60,000 for semi-urban areas

Registration process of the company with RBI

Step 1: Register the brand name as a trademark

Step 2: Obtain the certificate of No Lien from the bank by depositing Rs.5 crore as FD

Step 3: Submit the DPR with documents and project report

Step 4: Complete RBI formalities and get certified copies

Step 5: Fill up the online application

Step 6: Submit a copy of the application to the Regional Office of RBI

Documents required

Education/Professional qualification proof of the Director
KYC and income proof of the director
Proof of work experience in the financial sector
Recent credit report of the directors
Net worth certificate of the directors
Memorandum of Association and Articles of Association
Incorporation certificate of the company
Banker’s Report about the company
Banker’s Certificate of No Lien stating the Net Owned Fund
Detailed Action plan about the products and risk assessment policy
Structure plan of the organisation

Eligibility to Register Micro Finance Company through Section 8 (without RBI)

Micro Finance companies can operate as a not-for-profit and can be registered as trust, NGO, society or company. It does not require RBI approval or minimum funds for registration.

Registration Process

The registration process requires a minimum of two individuals. The directors of the company should have a Digital Signature Certificate (DSC) and Directors Identification Number (DIN).

Step 1: Prepare DPR

Step 2: Make an application (Form INC-1) for the approval of the name of Micro Finance company

Step 3: Make an application for Central Government license (Form INC-12)

Step 4: After the approval of the Central Government, file for the incorporation of the company

Step 5: Apply for PAN and TAN of the company

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Loan Process

The cost of registration is Rs.47,000 and allows the company to give unsecured loans to small businesses of Rs.50,000 and a loan for dwelling residence up to Rs.1.25 lakh. The company needs to comply with RBI guidelines on processing charges and interest rate.