Microfinance Company Establishment

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Micro Finance Company

A Microfinance Company is simply the range of financial services being provided on a small (micro) level. They include loans, savings, and insurance, etc. Loans under micro-Finance are extended to small entrepreneurs and poor business owners having no collateral & marginal money. Generally, such borrowers wouldn’t otherwise qualify for a bank loan from the regularized banks due to their stringent requirements.

Most often, these microloans are provided to business owners involved in different trades. Such as farmers, agriculturists, fishing, carpentry, and transportation, etc.

The amount of loan is small. A maximum of Rs. 50,000 in rural areas and Rs. 1,25,000 in urban areas is allowed. Hence the name “Micro Finance”.

Also, many related facilities are offered by them to the borrowers regarding repayment.

Most of their clients are based in villages and remote areas, with little or no access to formal banking. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accountsmicroinsurance; and payment systems

Micro-Finance companies are entitled to impose a reasonable rate of interest only as stipulated by the central government and RBI. At least 70% of the total amount of loans extended by these financing institutions must help in developing routes of long-term income generation. For this reason, these companies have helped immensely in rural development and employment.

Categories of Micro Finance Company

Kinds of Micro Finance Companies

In India, you have the option of establishing a Microfinance business in a variety of organizational set-ups. Generally, only Non-Banking Finance Companies (NBFC) are the ones that are popularly known for being involved in such activities. NBFCs are first formed as companies and then have to essentially get registered with the Reserve Bank of India (RBI).

But there are many other models under which you can start your own micro-financing, Some of these other entities have also been exempted by the RBI to finance & provide loans. They are subject to specific regulations under different regulators. Thereby needing to be registered under those regulators and do not need RBI approval.

You can form your Microfinance company as either one of the below organization:

  • NBFC-MFI (Micro Finance Institution) – established as a company under the Companies Act, first, and then approved by RBI as NBFC-MFI.
  • Co-operative Society – registered under the Co-operative Societies Act 1912. Governed, generally, by the State Government.
  • Section 8 Company – registered as a company and then obtain a license from the central government.
  • Society – (Society Act 1860).
  • Trust – governed by the public trust Act of that State and The Indian Trusts Act, 1882.
FeaturesNBFC-MFISection-8 CompanyNidhi CompanySociety & TrustCo-operative Society
Regulator AuthorityCompanies Act & RBISection-8 of the Companies ActSection-406 of the Companies ActSocieties Registration Act OR Indian Trust ActState Cooperative Societies Act as Applicable
Minimum CapitalMinimum net owned funds (NOF) of Rs. 5 crores. (Rs. 2 crores for North Eastern)No minimum requirementNo minimum requirementNo minimum requirementNo minimum requirement
Rate of Interest

The lower of:

1. The average base rate of 5 largest commercial banks multiplied by 2.75 per annum, or

2. Cost of funds plus a 10% margin cap of (a) 10% for MFIs with a loan portfolio of more than Rs. 100 crores and (b) 12% for those with a loan portfolio of less than 100 crore

Same as NBFC-MFIMaximum Rate of Interest on Loans must not be more than 7.5% + Rate (maximum) offered on deposits.As agreed upon by the Members at a General Meeting and by the CommitteeAs agreed upon by the Board of Directors
Client BaseLower Income groupNon-Commercial Banking and NPOLower Income GroupMembers with a common interestNon-Commercial Banking and NPO

What Business Structure is Right for You

Microfinance Companies functioning under different regulatory authorities must get properly registered with them and apply for the licenses/ permits as necessary. They must also obtain the minimum net worth or share capital as prescribed under that regulatory body.

In India, some more local initiatives are active in disbursing microcredit. They may have diverse working models. Such as Self Help Groups (SHG), Joint Liability Groups (JLG), Individual, Limited Liability JLGs, etc. Groups of individuals pool their savings with these entities and arrange finance required to fulfill projects of one or more of their members. However, But they have zero or very low legal standing.

MFIs are subject to laws as per their structure and governing organization. A microfinance bank has to follow the banking regulations and will be supervised by the same oversight authorities as other banks. NGOs and cooperatives are controlled by distinct oversight authorities.

Commonly in India, microfinance businesses are choosing to be registered as NBFC-MFI (NBFC) or Section 8 Company.

Of these two, NBFC-MFI has to fulfill the requirements of minimum NOF. Therefore, you will require at least Rs. 5 crores and have registration with the RBI after your business has been incorporated as a company. The other way is to get registered as a Section 8 Company. Comparatively, more convenient, because RBI approval is not mandatory. And there is no requirement of holding a minimum capital. With much less registration cost, as well as RBI compliances.

NBFCLicenseIndia provides services of getting registered under both these structures. Let’s discuss the registration of your microfinance business as a Section 8 Company here.

Process of Micro Finance Company Registration

Step 1: DSC to be Registered & Name Approved

  • The first step is to get the signatures of the Directors certified. Apply for DSC (Digital Signature Certificate) for them to sign documents on behalf of the business.
  • At the same time, we also a unique name for your company & apply for its approval with RUN (Reserving Unique Name) service of the Central Registration Centre (CRC). The information about approval or rejection will be sent on your registered mail-id. A maximum of 2 names can be filled in the application form and you are allowed to apply twice only. Therefore, a Name Search is advised, to make sure the name is unique and unregistered. The name must end with words such as Association, Academy, Council, Charities, Federation, Foundation, Institute, Organisation, etc.

Step 2: DIN Registration

Next, application in Form DIR-3 is to be filed with the RoC (Registrar Of Company) to get a unique DIN (Director’s Identification Number) for each of the Directors.

Step 3: Certificate of Incorporation & License

Application to form a company under section 8 is to be attached to documents such as MOA, AOA, declarations, etc. And the right format must be used for applying. Also, apply to the central government (MCA) for a license to do the business of microfinance.

Step 4: Apply for PAN and TAN

Now, that we have received the Certificate of Incorporation (COI), the proof that the company has been established. (Company’s unique CIN (Company Identification number), is mentioned on this certificate.)

With this in hand, we apply for PAN & TAN. And open a bank account in the name of the company to start getting donations.

Conditions for Microfinance Company Registration

  • Registered Under: Companies Act, 2013.
  • LicenseSection 8 Company License to be applied to MCA (Ministry of Corporate Affairs).
  • directors least 2 Directors for a Private Limited Company or 3 Directors for Public Limited Company must be there. The maximum limit of Directors is 15. More Directors can be hired after passing a special Resolution in a general Meeting.
  • Indian Resident: At least 1 Director must be a resident of India (ROI). Having stayed in India for at least 182 days in the previous calendar year as specified in Section 149(3) of the Companies Act.
  • MoA Subscribers: For the business to be established as a private company or a public company, its MoA must have at least 2 or 3 subscribers, respectively.
  • MoA & AoA: The objective of the Company, names planned to be applied for, proposed registered office address, number of Directors and promoters, authorized capital, and number of shares to be subscribed by each promoter. A detailed plan to meet the social objectives must be mentioned in them. The RoC is empowered to ask about it.
  • Initial Capital: If an amount has been proposed as the initial capital for the Company, it must get deposited in the Company’s bank account within 2 months.
  • Property Management: The ownership of the property lies in the name of the Company and its disposal must follow the relevant rules mentioned under the Companies Act. (For example: With the consent of the Board of Directors in the form of a resolution).
  • Annual Compliance: All the compliances applicable to a company under the Companies Act are compulsory to be fulfilled. Such as the requirement of filing of accounts, statements, and the returns of the company with the ROC
  • Documents: All the Directors must own their valid DIN & DSC.

Documents for Registration

For Directors/Shareholders:For Company:

1. ID Proof (PAN Card, Voter ID, Passport, or Driving License),

2. Address Proof (Aadhaar, Passport, or any valid utility bill not older than 2 months),

3. Two passports Sized Photographs,

4. DSC,

5. The Consent to act as a Director in this company

6. Self-declaration about interest in other business entities.

Address Proof (House tax payment receipts in case of owned property or Rent Agreement & NOC from the landlord if the premises is rented)

Benefits of Registering as a Micro-finance Company

  • Credibility: A microfinance business registered with the Companies Act makes it trustworthy among peers. Because they know that this firm is being regulated and fulfilling government requirements, etc
  • Distinct Legal Identity: Your business will have a separate legal entity. A legal existence, distinct from its members and perpetual. Also has organized operations and greater flexibility.
  • Reduced Compliances: The company is not required to get register with RBI and no approval from it is needed. (Though it shall comply with its directions.) But RBI registration takes time and a lot of effort too. Not to mention the costs involved.
  • CARO: Provisions of Companies Auditor’s Report Order (CARO) do not apply to this kind of company.
  • No Minimum Capital Requirement: There is no requirement of holding a minimum capital. So you don’t need to deposit Rs. 5 crores in a bank account. Moreover, you can change the capital structure at any stage to grow further. The funds, essential for business operations, can be induced later, in the form of donations and/or subscriptions from members and the general public.
  • Limited Liability: The liability of the members is limited to the extent of unpaid shares held by them and nothing else. In case of a liability arising, the members would not get personally affected.
  • Reduction in Stamp Duty: The Stamp Duty for MoA, AoA, and other documents is quite low. Though it varies as per the State government rules.
  • Greater Flexibility: A Microfinance company is also exempt from many legal formalities as a public company. It enjoys special privileges under company law. Such as hiring Company Secretary or maintaining records of meetings, etc. are not mandatory.
  • Tax Benefits: Many tax benefits are granted to Micro Finance Companies and their members/donors in India.
  • Exemption to the donors: The donors are eligible for tax exemptions/deductions u/s 12A and 80G of the Income Tax Act.
  • Noble Cause: A Micro Finance Company is established mainly to promote socio-economic growth. They help bring sustainable development of the backward sections of the society.