Section 8 Microfinance Company

A Section 8 Microfinance Company operates under the Companies Act 2013 as a non-profit organization that provides financial services to underserved communities. Recognizing these entities' pivotal role, the Reserve Bank of India (RBI) has periodically revised guidelines to ensure their operations are impactful and aligned with national financial inclusion goals. These updates often relate to loan limits, interest rates, and operational standards, aiming to enhance the reach and effectiveness of microfinance services. This article delves into the regulatory landscape, benefits, and registration process associated with Section 8 Microfinance Companies. IndiaFilings offers comprehensive support in navigating the registration process of a Section 8 Microfinance Company.

Microfinance Company

Microfinance institutions specialize in offering financial services to underserved low-income populations, catering to their smaller financial needs, which conventional banks and financial entities do not typically address. These groups often lack the access and means to secure services from traditional financial channels.

Establishing Microfinance Companies

The Reserve Bank of India (RBI) typically permits only Non-Banking Finance Companies (NBFCs) to engage in financial operations. Nonetheless, the RBI grants specific exemptions to certain businesses, allowing them to undertake financial activities within defined limits.

Consequently, the registration of a microfinance company can be pursued through two distinct avenues:
Non-Banking Finance Companies (NBFCs) that are officially registered with the RBI.
Section 8 Companies are established following Section 8 of the Companies Act, 2013.

Section 8 Microfinance Company

Section 8 Microfinance Companies serve as pivotal financial entities offering small-scale financial solutions such as loans, credits, and savings, primarily designed to streamline access to credit for small businesses that face challenges in securing loans from traditional banks due to complex processes. Often referred to as Micro-credit or Micro-benefit Companies, they extend small loans to a wide array of small enterprises and individuals who lack access to conventional banking services or do not meet standard loan criteria.

These institutions typically disburse small loans, capped at Rs. 50,000 in rural areas and Rs. 125,000 in urban settings.
According to the Ministry of Corporate Affairs, forming a Microfinance Company as a Section-8 Company is the most straightforward method in India, enabling these companies to issue loans without demanding extra charges or collateral securities.
Microfinance Companies are permitted to charge modest interest rates as stipulated by the RBI and the central government, which is crucial in supporting various facets of rural and agricultural advancement, including income enhancement and job creation.

If you're considering registering your company, IndiaFilings offers a seamless Section 8 Company registration process, providing expert guidance for all your compliance requirements.

The objective of Section 8 Microfinance Company

The primary objectives of Section 8 Microfinance Companies are centred around empowering individuals and communities through financial inclusion. These objectives include:

Empowering low-income individuals to achieve self-sufficiency by providing them with financial services and opportunities.
Offering banking services tailored for small monetary transactions to cater to the needs of those traditionally excluded from the banking sector.
Extending financial support to individuals engaged in various trades and professions, such as transportation, fishing, carpentry, etc., to enhance their economic stability.
Assisting small businesses in accessing financial services without the need for collateral, thus enabling their growth and sustainability.
Promoting the active participation of women in economic activities by providing them with financial tools and opportunities to create sustainable livelihoods.
Facilitating access to quality healthcare services through financial support improves the overall well-being of underserved communities.

Enhancing the income sources of low-income individuals by offering diverse opportunities for self-employment and income generation, thereby contributing to poverty alleviation and economic development.

Key Features and Regulatory Exemptions of Section 8 Microfinance Companies

Section 8 Microfinance Companies possess distinct features that set them apart in the financial landscape, primarily aimed at fostering financial inclusion. Key features include:

RBI Approval Not Required: Section 8 Microfinance Companies operate without the need for explicit permission from the Reserve Bank of India (RBI), simplifying their establishment and operation.
No Minimum Capital Requirement: Unlike other financial institutions, there is no mandate for a minimum capital investment of Rs. 5 crores, making it more accessible for entities to start microfinance operations.
Flexibility in Loan Provisioning: These companies are empowered to offer unsecured loans up to Rs. 50,000 to small businesses and up to Rs. 1.25 lakh for primary residential purposes, effectively addressing their target demographics' needs.
Adherence to RBI's Pricing Guidelines: Despite the exemption from certain regulations, Section 8 companies must comply with the RBI's stipulations regarding interest rates and processing fees, ensuring fairness and transparency in their operations.
Legal Rights in Loan Recovery: They are recognized as legitimate financing entities with the legal authority to pursue recovery from defaulters, safeguarding their financial interests.
Exemption under RBI Act: The RBI's master circular dated July 1, 2015, exempts Section 8 companies engaged in microfinance from sections 45-IA, 45-IB, and 45-IC of the RBI Act, 1934, provided they focus on micro-lending within specified limits and do not accept public deposits. This exemption underscores the RBI's support for microfinance activities to elevate the underserved populations' income levels and living standards without the stringent regulatory framework applicable to typical Non-Banking Financial Companies (NBFCs).

Advantages of Operating as a Section-8 Microfinance Company

The Indian Government and the Reserve Bank of India have established a supportive regulatory framework for Microfinance Institutions (MFIs), granting the sector credibility and momentum. The benefits of establishing a microfinance business under this framework include:

Accessibility to Funding: Microfinance companies are crucial in bridging the financial gap by providing accessible funding options to underserved communities, thus facilitating economic inclusion.
Promotion of Entrepreneurship: By offering financial services tailored to the needs of small-scale entrepreneurs, these institutions encourage self-reliance and the establishment of new businesses, contributing to economic development.
High Repayment Rates: Microfinance institutions typically report higher loan repayment rates than conventional banking products, indicating a strong credit discipline among their clientele.
Short-term Financial Resilience: These companies offer a lifeline to individuals and businesses in need, providing financial stability during temporary hardships and enabling recovery and growth.
Diverse Credit Solutions: Catering to a wide range of needs, microfinance companies offer various forms of credit assistance, including emergency loans, consumer loans, business loans, working capital loans, and housing loans, thereby addressing the multifaceted financial needs of their target demographic.

Revised RBI Guidelines on Section 8 Microfinance Companies

RBI has revised Guidelines on Section 8 Microfinance Companies, which are explained below:

Scope of Loans: The Reserve Bank of India has broadened the definition of microfinance loans to include collateral-free lending to households with an annual income of up to INR 3,00,000.
Repayment Cap: Ensures monthly loan repayments do not surpass 50% of the household's monthly income, promoting financial responsibility.
Increased Loan Amounts: Section 8 microfinance companies can now extend loans up to INR 2,40,000 to qualified clients, aiming to meet more significant financial needs.
Interest Rates Oversight: The RBI insists on keeping interest rates and other associated charges moderate, with supervisory audits to ensure compliance.
Loan Card Issuance: Each borrower will receive a loan card that comprehensively details the loan amount, interest rate, processing fees, and applicable penalties, increasing transparency and borrower awareness.
Conversion Requirement: If a Section 8 microfinance company's assets exceed INR 100 crore, it must transition to an NBFC-MFI within three months, allowing it to scale operations while remaining a non-profit.
No Shift to For-Profit: This requirement facilitates the growth of large microfinance entities without mandating a change to their foundational non-profit nature.

Section 8 Microfinance Company Registration

Section 8 Microfinance Company Registration pertains to establishing non-profit organizations under the Companies Act 2013, aimed at furthering charitable goals, including education, art, commerce, and more. When integrated into the microfinance industry, it leads to the creation of entities focused on offering financial assistance to underserved populations.

Prerequisites for Section 8 Microfinance Company

Prerequisite	Section 8 Company
Approval of RBI	Not Required
Net Owned Funds	No minimum requirement
Director Experience	No prior experience is required
Limit on Loans	Unsecured loan of Rs 50,000 to small business; Loan up to Rs 1.25 lakh for residential purposes
Complexity of Registration	Relatively simple, registered as a non-profit organization
Adhering to Compliances	Must adhere to RBI compliance, but less stringent compared to NBFC
Number of Members	Minimum of 2 members
Status of Organization	Non-profit organization

Section 8 Microfinance Company Registration Process

The Procedure for registering a Section 8 Microfinance Company Registration is explained as follows: Registering as a Section 8 Microfinance Company involves a structured procedure to establish a non-profit entity dedicated to providing financial services to underserved communities. Here's a breakdown of the essential steps in the registration process:

Step 1: Obtain a DSC and DIN

The foundational step involves securing a DSC for the proposed directors to facilitate the authorization of electronic forms. Additionally, obtaining a DIN for each director is essential for their official identification in company records.

Step 2: Name Approval Application

The company's proposed name must reflect its Section 8 status, incorporating terms like 'Sanstha', 'foundation', or 'micro credit'. This is formalized through Form INC-1, which also requires specifying the company's industrial activity code and object clause. [pdf-embedder url="https://www.indiafilings.com/learn/wp-content/uploads/2024/01/Form-INC-1.pdf"]

Step 3: Drafting and Filing of MoA & AoA

Following name approval, the next critical step is to draft the Memorandum of Association (MOA) and Articles of Association (AOA), outlining the company's objectives, rules, and governance structure. These documents are then filed with the necessary paperwork to solidify the company's legal foundation.

Step 4: Submission of Relevant Documents

The final stage in the registration process entails compiling and submitting all pertinent documents, including the incorporation certificate and Form INC-12, to secure the company's license. Essential documents for this phase include:

PAN Card copies of directors/promoters
Identity and address proofs
Photographs of directors/promoters
Proof of registered office ownership or rental agreement
NOC from the property owner
State-mandated stamp duty
Considerations and Decision Making

Step 5: Certificate of Incorporation Issuance

Upon the Ministry of Corporate Affairs' approval of the submitted documents, the final step culminates in issuing a Certificate of Incorporation, officially recognizing the company's establishment. Registering a Section 8 microfinance company offers a streamlined path compared to other models, with fewer regulatory hurdles and no minimum capital requirements. However, it's crucial to note that such entities typically face limitations in their lending capacity. Organizations must weigh these factors carefully to make an informed decision that aligns with their mission and operational capabilities. Note: It's important to note that, according to the latest guidelines from the Ministry of Corporate Affairs (MCA), the establishment of Section 8 Companies to conduct microfinance activities is currently restricted. This prohibition also applies to any efforts to modify the object clause of an existing Section 8 Company through a special resolution. For further details, please refer to the circular issued by the MCA. IndiaFilings can provide expert assistance in navigating the registration process for a Section 8 Microfinance Company, ensuring a smooth and compliant setup for your non-profit financial entity.