How to Start a MICRO FINANCE COMPANY REGISTRATION

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Overview of Microfinance Company Registration

In India, a Microfinance Company is a financial institution that provides small-scale financial services, such as loans, credit, or savings. These companies are designed to simplify the credit process for small businesses that struggle to secure loans from banks due to complex procedures. Microfinance companies offer affordable loans to small businesses or households that lack access to formal banking channels or are ineligible for traditional loans.

The most straightforward method of registering a Microfinance Company in India is to incorporate it as a Section 8 Company with the Ministry of Corporate Affairs (MCA), without charging any margin money or requiring collateral security. This structure enables the company to provide loans at lower rates, as regulated by the Reserve Bank of India (RBI) and the Central Government.

It is important to note that a Microfinance Company is classified as a Non-Deposit Taking Non-Banking Financial Company (NBFC) and is distinct from a Section 8 Company. The operations and activities of a Microfinance Company are governed by the RBI Act, 1934, and the regulations set forth by the RBI.

Benefits of Microfinance Company Registration

The key advantages of registering a Microfinance Company include:

  • No Collateral Requirement: Microfinance companies do not require collateral for lending funds.
  • Employment Generation: They play a significant role in generating employment opportunities.
  • Rural Development: These companies contribute to the growth and development of rural areas.
  • Income Generation: They provide an opportunity for individuals to earn an income.
  • No Minimum Capital Requirement: Microfinance institutions (MFIs) do not have a set minimum capital requirement.
  • Better Repayment Rates: They often offer better rates of repayment due to their personalized lending approach.
  • Promotes Self-Sufficiency: MFIs help people become financially independent and self-sufficient.

Who is Eligible to Receive a Loan from a Microfinance Company?

Microfinance institutions typically extend loans to:

  • Agricultural Activities
  • Small Scale Businesses
  • Professional and Transport Trades
  • Artisan Businesses

Requirements for Microfinance Company Registration

The essential requirements to start a Microfinance Institution in India are:

  • The company must be registered under the Companies Act 2013 or the Companies Act 1956.
  • A Net Owned Fund (NOF) of at least Rs 5 crores is required.
  • Loans can only be provided within the range of Rs 50,000 to Rs 1.25 lakh.
  • Promoter Details must be provided.
  • At least 85% of the total NOF should consist of Qualifying Assets.
  • No minimum capital requirement exists for registration.

Types of Microfinance Institutions

There are two main types of Microfinance Institutions:

  1. RBI Registered Microfinance Institutions: To register as an NBFC microfinance company, the applicant must incorporate a Private or Public Limited Company under the Companies Act 2013. After incorporation, they must meet RBI’s capital requirements and submit the necessary application at the RBI regional office.

  2. Section 8 Registered Microfinance Institutions: To register as a Section 8 Company, the applicant must first apply for Digital Signature Certificates (DSC) and Directors Identification Numbers (DIN) for all proposed directors. Following this, they need to submit an application for Name Approval (Form INC-1), draft the Memorandum of Association (MOA) and Articles of Association (AOA), and file Form INC-12 with the required documents to obtain a license.

Documents Required for Microfinance Company Registration

To register a microfinance company in India, the following documents are needed:

  1. Certificate of Incorporation (COI) of the Company.
  2. PAN Card details of the Directors and Applicant Entity.
  3. Digital Signature Certificate (DSC) and Director Identification Number (DIN) for all Directors.
  4. Recent passport-sized photographs of all proposed Directors.
  5. Address Proof of the registered office.
  6. Rental Agreement (if the office is on rented property).
  7. Ownership Certificate or Sale Deed (if the office is self-owned).
  8. Certified copy of the Memorandum of Association (MOA) and Articles of Association (AOA).
  9. Certified Banker’s Report.
  10. A copy of the Board Resolution.
  11. Auditor's Report showing the minimum required Net Owned Funds.
  12. Certified copy of the Compliance Certificate from a Chartered Accountant.
  13. Structured Business Plan of the company.
  14. Latest Financial Report of the Directors.
  15. Income Proof of the Key Managerial Personnel (KMP) and Directors.
  16. If the proposed director is an Indian National, a copy of the passport is required. If the director is a Foreign National, notarized or apostilled copies of the passport must be submitted.

Requirements for Microfinance Company Registration as an NBFC vs Section 8 Company

Criteria NBFC Section 8 Company
Experience of Director Minimum 10 years in the financial sector. No prior experience required.
Total Number of Members Public Ltd: At least 7 members; Pvt Ltd: 2 members Minimum of 2 members required.
RBI Approval Required Not required
Adherence to Compliances Must comply with all NBFC regulations. Must comply with RBI regulations (less stringent).
Organisation Status Profit-oriented organization. Non-profit organization.
Limitation of Loans Maximum 10% of total assets. Loans: Unsecured loans up to Rs. 50,000 for small businesses, Rs. 1.25 lakh for dwelling houses.
Net Owned Funds (NOF) Minimum Rs. 5 crores. No minimum requirement.
Difficulty of Registration Complex, as it requires adherence to NBFC processes. Relatively easy, as it's a non-profit registration.

This table clarifies the differences and specific requirements between setting up a Microfinance Company as an NBFC or as a Section 8 Company.

Procedure for Microfinance Company Registration as an NBFC

The process of registering a Microfinance Company as an NBFC (Non-Banking Financial Company) involves the following steps:

Step 1: Company Registration
The first step is to establish a company. To register as an NBFC Microfinance Company, you need to form either a Public Limited Company (with a minimum of 7 members) or a Private Limited Company (with at least 2 members and a capital of Rs. 1 lakh).

Step 2: Raise the Capital
Once the company is incorporated, you must raise the required Net Owned Funds (NOFs). The minimum requirement is Rs. 5 crores, though for companies in the northeastern region of India, the minimum NOFs requirement is Rs. 2 crores.

Step 3: Capital Deposit
After raising the required capital, you need to deposit the funds in a traditional bank as a fixed deposit. A No Lien Certificate must be obtained from the bank to confirm that the deposit is not encumbered.

Step 4: Apply for NBFC License
The final step is to apply for an NBFC license. This involves completing the online application form and submitting it along with the required documents. You must also submit a hard copy of the application to the RBI’s regional office. The documents required include:

  • MOA (Memorandum of Association) and AOA (Articles of Association).
  • Board Resolution.
  • Banker’s report for the company.
  • Net-worth Certificate of the directors.
  • Company Registration Certificate.
  • Educational or professional qualifications of directors.
  • Organizational structure plan.
  • Auditor’s report of the fixed deposit receipt.
  • Income proof and KYC of directors.
  • Proof of financial sector work experience of directors.
  • Latest credit report of directors.
  • Banker’s Certificate of No Lien for the NOF.

Procedure for Microfinance Company Registration as a Section 8 Company

Alternatively, a Microfinance Company can be registered as a Section 8 Company. The steps involved are as follows:

Step 1: Prepare DSC and Apply for Name Approval
Begin by preparing the Digital Signature Certificate (DSC) and applying for name approval through the SPICe+ Form.

Step 2: File Applications with ROC
Once the name is approved by the regional director, proceed to file the application for Section 8 Company Registration with the Registrar of Companies (ROC). This filing must include all necessary documents and will result in the issuance of the Company Identification Number (CIN) as per the SPICe+ form.

Step 3: Submit MOA and AOA
Draft the Memorandum of Association (MOA) and Articles of Association (AOA), and file them along with other important documents.

Step 4: PAN, TAN & Bank Account
Ensure you have the company’s PAN, TAN, and a bank account set up, as these are required during the Section 8 Company registration process.

This streamlined process covers all key steps for registering a microfinance company either as an NBFC or a Section 8 Company.

Mandatory Compliance for Microfinance Institutions

The mandatory compliance requirements for Microfinance Institutions are as follows:

RBI Compliance:
RBI Compliance refers to the set of guidelines issued by the Reserve Bank of India for the operation of Microfinance Companies. While it is not mandatory for a Microfinance Company to meet all the RBI criteria, it is required to adhere to the relevant RBI rules and regulations specific to its operations.

Companies Act 2013:
If a Microfinance Company is registered as a Section 8 Company, it must comply with the provisions outlined in the Companies Act of 2013, which governs the formation, regulation, and management of companies in India.