How to Form a Microfinance Company

A micro-finance Company is a non-deposit-taking Non-Banking Financial Company (NBFC) that offers micro or small finance to low-income groups and families with less income living in rural and urban areas. A Micro Finance Company or Institution extends small funding support at a competitive interest rate with flexible repayment options. The Micro Finance Institutions (MFIs) mainly cater to individuals/organizations who are unable to borrow money from mainstream banks, NBFCs or other financial institutions.

Features of Micro Finance Company

• Loans offered to borrowers from Low-Income Groups
• Collateral-free loans with no pre-payment charges
• Shorter repayment tenure
• Minimum Net owned funds should be Rs. 5 crores if registering as an NBFC (Rs. 2 crores for North East Regions of India)
• Not mandatory to be a member of any of the Self-Regulatory Organizations (SRO) such as RBI, SEBI, NABARD, SIDBI or IRDA
• 4% or less should be the difference between the interest rate charged
• MFIs need to be a member of Credit Information Companies (CICs)
• MFIs shall demand processing charges from the customers not more than 1% of the loan amount

Microfinance Company Registration

Microfinance companies, as the name suggests, are financial institutions that provide finances to low-income groups, where the finance requirement is lesser as compared to other sectors of society. These sectors generally do not have access to traditional financial institutions such as banks and other financial institutions.

Documents Required for Registration

• Duly filled application form with passport-sized photographs of all directors
• KYC of directors and shareholders (Passport, Voter’s ID card, Driving License, Aadhar card, Utility Bills)
• Business Incorporation Certificate
• Income proof of directors and shareholders along with their PAN cards
• Business address proof or rental agreement
• NOC from the owner
• Applicable stamp duty (As per state)
• Any other documents required by the respective authority

Following the mentioned steps and submitting these documents, an entrepreneur can run a Micro Finance Company after the incorporation of a company and after getting approval from the RBI.

Registration Process

Below specified are the steps to register as a Micro Finance Company with the Registrar of Company (ROC):

Step 1: Register as a Private or Public Limited Company– The first step is to register as a private or public limited company and then get registered as an NBFC Micro Finance Company

Step 2: Being eligible for registering as a Private or Public Limited Company- The capital investment of a minimum of Rs. 1 lakh with 2 members for private companies and 7 members with an amount of Rs. 5 lacks for public limited company registration

Step 3: Raise capital– Arrange and raise the capital of net owned funds of at least Rs. 5 crores to further deposit in a bank as a Fixed Deposit to get a ”No Lien” certificate from the bank

Step 4: Apply for NBFC License– NBFC License can be applied for and obtained by filling and depositing an online application form to the Registrar of Companies with the submission of a hard copy with RBI

Step 5: Get an NBFC Registration Certificate to start a Micro Finance Company– After the form submission and approval from ROC get the NBFC certificate in 10-15 working days.

Need for Microfinance Companies

In India, there are many institutions like banks that grant loans to finance businesses. So why do we need microfinance companies? The need arises as it serves the following purposes:

• It provides financial assistance to enterprises that cannot place collateral
• It encourages women’s entrepreneurship
• It provides startups with much-needed support
• It offers assistance even for nominal amounts which generally are funded as hand loans
• It formalizes the process of lending and hence brings about discipline in borrowing by low-income groups. This prevents over-borrowing and reduces complications arising out of high future debts.

Formation of Microfinance Companies

Ideally, only a Non-Banking Finance Company (NBFC) is authorized by the Reserve Bank of India to conduct financial business. However, certain exemptions are provided by RBI to particular businesses to perform financial activities up to a specified limit.

Therefore, a microfinance company registration can happen in the following two ways:

• Non-Banking Finance Companies (NBFC) duly registered with RBI
• Section 8 companies (companies formed under Section 8 of the Companies Act 2013)

Prerequisites for Microfinance Company Registration

To register as a microfinance company either through an NBFC or Section 8 company, some prerequisites must be met. The requirements are as detailed below:

Prerequisites	NBFC	Section 8 Company
Approval of RBI	Mandatory	Not Required
Net owned funds	Minimum 5 crores	No minimum requirement
Director experience	One director must have experience of more than 10 years in financial services	No prior experience required
Limit on loans	Maximum of 10% of total assets	Unsecured loan of Rs 50,000 to small business loan up to Rs1.25 lakh to dwelling residence
Complexity of Microfinance Company Registration	All processes involved in forming a company have to be performed.	Relatively simple as it is registered as a non-profit organization
Adhering to Compliances	It has to adhere to all compliances of an NBFC.	Adhere to compliance of RBI, but they are less stringent in comparison to NBFC
No of members	For a private limited company minimum of 2 For a public limited company minimum of 7	Minimum of 2 members
Status of organization	Profit organization	Non-profitable organization

Microfinance Company Registration as an NBFC

Given the differences in the two models for forming a microfinance company, the registration process also varies considerably. The following are the steps involved in the registration of a microfinance company through an NBFC:

• Register a company: To be registered as an NBFC microfinance company, the first step is to form a private or public company. To form a private company, at least 2 members and a capital of Rs 1 lakh is required. To form a public company, at least 7 members are required.
• Raise capital: The subsequent step is to raise the required minimum net-owned funds of Rs 5 crore. For the northeastern region, the requirement is Rs 2 crore.
• Deposit the capital: On collection of capital, the next step is to deposit the capital in a bank as a fixed deposit and obtain a ‘No lien’ certificate for the same.
• Apply for license: Finally, the NBFC must fill out an online application for the license and submit it along with all the certified documents. A hard copy of the application and license must also be submitted to the regional office of the Reserve Bank of India. The documents that must be available with the NBFC at the time of filing are:
  • Memorandum of Association and Articles of Association
  • Incorporation certificate of the company
  • Board resolution copy
  • Copy of Auditor’s report of receipt of the fixed deposit receipt
  • Banker’s Certificate of No Lien stating the net owned fund
  • Banker’s report about the company
  • Recent credit report of the directors
  • Net worth certificate of the directors
  • Education/professional qualification proof of the directors
  • KYC and income proof of the directors
  • Proof of work experience in the financial sector
  • Structure plan of the organization

Microfinance Company Registration as a Section 8 Company

The other option is to register a company as a Section 8 company. The procedure to be followed for the same is as follows:

• Apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN): To form a company, the first process is to apply for a DSC and DIN. The DSC is essential for authorizing the e-forms.
• Apply for name approval: The next step is to apply for name approval in Form INC-1. The name must suggest that it is registered as a Section 8 company. So it must have the words Sanstha, foundation or micro-credit.
• File Memorandum of Association (MOA) and Articles of Association (AOA): Post the name approval; the company must draft the MOA and AOA and file it along with necessary documents.
• File all relevant documents: The last step is to file all relevant documents along with the incorporation certificate, and Form INC -12 to obtain a license. The primary basic documents required for registering a company under both models are:
  • PAN Card copy of all directors/promoters
  • Documents for identity proof
  • Documents for address proof
  • Photograph of all directors/promoters
  • Proof of ownership of registered office or rental agreement for the same
  • NOC from the owner
  • Applicable stamp duty as mandated by the state
  • Any other documents as required

As it’s evident, registering a microfinance company as a Section 8 company is relatively easier; however, the lending capacity is also limited. Hence an institution must take into consideration all the facts and make a wise decision. 

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