Be it an NBFC or a Section 8 company, this article tells you what you need in order to, and how to, set up a microfinance company in India.
Are you looking for how to start a microfinance company? Great decision indeed! Now, there are 2 ways in which you can set up a microfinance company. Before you pick one, read this blog to understand the difference between these two types and the process of setting them up.
This way you get clarity and can set up your company successfully. We also share with you the easiest way to set up a microfinance business in the end.
The 2 Ways to Set Up a Microfinance Company:
- As an NBFC (Non-Banking Finance Company), registered with the RBI
- As a Section 8 company (formed as per the provisions of Section 8 of the Companies Act, 2013).
Prerequisites for the Registration of a Microfinance Company
You must meet certain prerequisites before starting with the microfinance company registration process.
1. For Registering as an NBFC
- It is mandatory to have RBI approval
- You should have a minimum net owned fund of ₹5 crores
- One of the directors must have over 10 years of experience in the service industry
- You must have maximum a loan limit of 10% of the total assets
- Further, you must follow the due process of forming a company
- You must have a minimum of 7 members to register as a public limited company. 2 members will be enough for a private limited company.
2. For Section 8 Microfinance Company Registration
- RBI approval is not mandatory
- There is no minimum requirement of net owned funds
- No need of any prior experience for the directors
- You can disburse unsecured loans up to ₹50,000 to small businesses. Also, loans up to ₹1.25 lakh can be disbursed to dwelling residence
- You must have a minimum of 2 members for Section 8 microfinance company registration
You need to analyse these requirements and see which type of company is better for you. An NBFC takes a lot of investment and approvals to set up but it provides more flexibility in the loans you can provide and to whom.
On the other hand, a Section 8 company is much easier to set up. However, there are limitations on how much you can lend.
Microfinance Company Registration Process
The process varies depending on whether you want to register as an NBFC or as a Section 8 company. We will discuss the steps involved in both these models.
1. Process for NBFC Registration
STEP 1: Form a Company and Register
To register as an NBFC microfinance company, you should first form a public or private company. A minimum of 7 members is required to form a public company. A minimum capital of ₹1 lakh and 2 members are required to form a private company.
STEP 2: Raise the Minimum NOF
You need to raise a minimum capital of ₹5 crores as the Net Owned Fund (NOF). Further, this amount is ₹2 crores for the north-eastern region.
STEP 3: Deposit the Capital
In this step, you need to deposit the capital as a fixed deposit in a bank. The bank will provide a ‘No Lien’ certificate.
STEP 4: Apply for the License
After that, you must apply online for a license from RBI to provide financial assistance. Similarly, along with the application, you should submit certain documents such as
- Memorandum of Association (MoA)
- Articles of Association (AoA)
- Company incorporation certificate
- Board resolution copy
- Auditor’s report regarding receipt of the fixed deposit receipt
- No lien certificate from the banker stating the net owned fund
- Structure plan of the company
- Recent credit report of the directors
- Professional qualification and education proofs of the directors
- Income proof and KYC of the directors
- Proof of experience of the directors in the financial sector.
After the license is obtained, a hard copy of the same must be submitted to the RBI regional office.
Process for Section 8 Company Registration
STEP 1: Apply for DSC and DIN
The DSC (Digital Signature Certificate) and DIN (Director Identification Number) is for the authorisation of the e-forms. So, if the directors of the company don’t have them, the first step is to get these two for the directors of the company.
STEP 2: Apply for name approval
You need to apply for the name approval by filing Form INC-1. Please note that your proposed name must suggest that it is a Section 8 company. The company name must include the words such as ‘foundation’, ‘ micro credit’, or ‘sanstha’.
STEP 3: File AoA and MoA
After you receive the name approval, the next step is to draft the Articles of Association (AOA) and the Memorandum of Association (MOA). These should be filed along with specified documents.
STEP 4: Apply for incorporation
You need to file for company incorporation under Form INC-12. Certain documents will have to be submitted along with. These are listed below:
- PAN card copies of all the directors/promoters
- Identity proof documents
- Address proof documents
- Photographs of all the directors/promoters
- Ownership proof of the registered office (Rental Agreement or owner NoC for rented premises)
- The stamp duty is applicable in the state concerned.
Microfinance Company Registration Fees
The registration cost for microfinance companies varies depending on the type of company. Moreover, the registration cost for the Section 8 company is ₹25,000. Moreover, the registration fees for the NBFCs hover between ₹4 to 5 lakhs at present.
Easiest Way to Set up Your Section 8 Microfinance Company
If you have decided to set up a Section 8 company and find the process overwhelming, we have the easiest solution for you. Vakilsearch can register your Section 8 company for you! Our experts will take care of the whole process and guide you through it. Further, if you have any questions or doubts about the process, you can contact our support team.
FAQ
What are the key regulatory requirements for establishing a microfinance company?
Micro-finance companies are governed by the Companies Act of 2013 and the rules and regulations prescribed by the Reserve Bank of India, which is its central regulatory authority.
How can technology be leveraged to streamline operations in a microfinance business setup?
Technology can be leveraged to streamline operations in a microfinance business setup by automating processes, improving customer service, and enhancing transparency and efficiency. This can be achieved through the use of digital platforms, mobile applications, and data analytics to improve lending decisions, track loan performance, and manage risk exposure.
What financial instruments are commonly employed by successful microfinance companies?
Successful microfinance companies in India commonly employ various financial instruments, including microloans, group loans and savings products. These instruments are tailored to the needs of low-income and financially excluded individuals and groups, offering small loans and savings options that cater to their unique financial requirements.
Are there specific qualifications or certifications required to start a microfinance company?
Yes, there are specific qualifications and certifications required to start a microfinance company in India. To know more, request a callback from our experts for a detailed explanation.
In what ways can a microfinance company effectively assess and mitigate risks in its operations?
A microfinance company can effectively assess and mitigate risks in its operations by implementing robust risk management practices, such as credit risk management, market risk management, operational risk management and interest rate risk management.
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