Registration of Microfinance Institutions

Registration of Microfinance Institutions

Small enterprises and stay-at-home mothers who are unlikely to obtain a loan from banks due to a lack of adequate facilities and documents might benefit from financial services provided by microfinance institutions (MFI) established under the Companies Statute, 2013, or the preceding act of 1956.

Most loans under one lakh rupees qualify as micro-loans, and small business owners can always rely on microfinance organisations for their financial needs. If a business is properly registered, licensed, and has the minimum net worth, it can quickly become an MFI.

In India, finance businesses are invariably only authorised to operate as Non-Banking Finance Companies (NBFC). However, some types of businesses have been exempted by the Reserve Bank of India (RBI) from involving themselves in a limited range of financial activities.

Thus, the two most ideal forms of MFI are

• NBFCs (registered with the RBI)
• Section 8 companies.

Benefits of Microfinance Institutions

The following are some benefits of microfinance institutions.

• They provide financial assistance to entrepreneurs and companies that have no collateral
• They encourage female entrepreneurship
• They support a healthy startup environment
• They offer assistance even at amounts that would normally be considered as hand loans
• They formalise the process of lending to low-income groups, preventing over-borrowing and reducing complications arising out of high future debt
• They experience a better overall loan repayment rate than traditional banks do

Registration of NBFCs

An NBFC-MFI is a business that has registered with the RBI apparently to operate as a microfinance institution. It's a common misperception that all NBFCs are permitted to accept deposits, however, this is untrue. The majority of NBFCs are not permitted to accept public deposits. Additionally, if any NBFC requires deposits, it must apply for a license from the RBI using a separate application form.

Process of Registering an MFI as an NBFC

The procedure to register an MFI as an NBFC is complex and a little costly. As per the RBI, any NBFC shall be registered only with minimum net-owned funds of ₹2 crores. Further,

• The first step is to form a private limited company –which requires at least two members and a raised capital of ₹1 lakh – or a public company, which requires at least seven members – with a minimum net owned funds of ₹5 crores. For the north-eastern region, the requirement is ₹2 crores
• On capital collection, the next step is depositing the capital in a bank as a fixed deposit and obtaining a ‘No lien’ certificate
• Once the above two steps are completed, the NBFC must file an 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 RBI.

Documents Required at the Time of Filing

• Memorandum of association and articles of association
• Incorporation certificate of the company
• Board resolution copy
• Copy of auditor’s report of receipt of 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 director
• KYC and income proof of the director
• Proof of work experience in the financial sector
• Structure plan of the organisation.

Registering a Section 8 Company

The other option is to register a company as a Section 8 company. This structure has numerous advantages, as RBI approval is not required at all, though compliance with RBI guidelines on the interest rate and processing charges is still mandatory.

However, the lending capacity is also limited, and the minimum deposited fund amount of ₹2 crores is not required either. Registration fees are much less – under ₹50000 – this is the cheapest way to register an MFI. Compliance requirements also tend not to be quite as stringent as in the case of NBFCs.

However, there are limits to the financing ventures allowed to a Section 8 company. For instance, loans for residential dwellings cannot be more than ₹1.25 lakhs, and unsecured small business loans cannot be more than ₹50000.

There is a misconception among the general public that there are limitations to the legal rights of Section 8 companies. Section 8 companies are completely legal and can even sue defaulters.

Process of Registering an MFI as a Section 8 Company

• The first step is to apply for a DSC and DIN, which is essential for authorising e-forms
• Name approval in Form INC-1 will be obtained next. There is a requirement that the name of Section 8 registered MFI must suggest that it is registered as a Section 8 company, which means it needs to have the words Sanstha, foundation, or micro-credit in the title
• Once name approval is obtained, the company must draft the MOA and AOA and file it along with all necessary documents, the incorporation certificate, and Form INC -12 to obtain a license.

Documents Required at the Time of Filing

• PAN Card copy of all directors/promoters
• Proof of identity
• Proof of address
• Photograph of all directors/promoters
• Proof of ownership/occupation (rental/lease agreement) of the registered office
• NOC from the owner of property in cases where the office is leased/rented
• Applicable stamp duty as mandated by the state
• Any other documents as required

Why Vakilsearch?

Microfinance Institutions are on the rise, and it is matching the number of banks in the country. Vakilsearch has tasted more success in the registration of GST, FSSAI and many more. Microfinance institutions are no different. Our expert team will help you to collect the necessary documents for the registration process. The registration process at Vakilsearch is completely transparent, and we will clarify all your doubts during the registration process.

FAQs on Registration of Microfinance Institutions