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Microfinance Company Registration in India- Overview

Microfinance companies act as lenders in the microcredit industry. The provision of finance through microfinance is basically the provision of finance to participants in a particular industry. Some of the microcredit products available in the market include; microloans. It is a type of finance that provides loans to business borrowers of microenterprises.

Microloans also provide loans to poor households and small and medium enterprises (MAEs) in the form of short-term term loans. The financial organizations that operate under the microfinance industry provide loans to individuals with an intent to expand their businesses and hence increase their production and incomes. Microloans are generally high interest loans.

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Microfinance Registration Package

Rs.20,000/-+18% GST

  • WHAT WE PROVIDE
  • DOCUMENTS REQUIRED
  • Certificate of Incorporation (CIN)
  • Permanent Account Number (PAN)
  • Memorandum of Association (eMOA)
  • Articles of Association (eAOA)
  • Director's Identification Number (DIN No)
  • Digital Signature (DSC)
  • GST
  • Registration license
  • PF Registration
  • ESIC Registration
  • Required two names of the Company
  • Companie's Object
  • Office Address Proof (Rent Agreement, Receipt, Electrical Bill, Owner Property tax)
  • Director's PAN, Aadhar, Voter Card
  • Director's Electrical Bill
  • Director's Driving Licence or Passport (If any)
  • Director's Last 6 months Bank statement
  • Director's Photo
  • Director's Email and Mobile

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Types of Microfinance Institutions In India

Microfinance Institutions are established to help alleviate poverty in the areas that are financially backward. There are several types of Microfinance Companies operating in India. Let us take a look at them:

1. Self Help Group
Self Help Group is either a formal or informal group run by small entrepreneurs with the similar socio-economic background. They come together and invest with small savings to meet the needs of their business. These are mostly Non Profit Organizations. When they have arranged a sufficient amount of funds then they lend the members or others in the village for any purpose. In this microfinance service, there is no need for collateral.

One of the most recognized is NABARD SHG linkage program where several self-help groups are permitted to borrow credit from the bank once they successfully provide a track record of regular repayments of their debtors. It has been very successful especially in various parts of India like Andhra Pradesh, Tamil Nadu, Kerala and Karnataka and during the year of 2005-06. These states received SGH linkage credit of about 60% (Taruna and Yadav, 2016).

2. Bank Guarantees Model
In this type of MFI, a government agency or a donor guarantees small loans by a commercial or microfinance bank to a group of borrowers or individuals. It is mainly composed of 4-10 members jointly who avail loans against a mutual guarantee from banks for an agricultural or mutual purpose.

3. Village Banking / Community Banking
Village banks are formed by members of a specific community or individuals who jointly come together from the same village, neighbourhood and form a centre. These associations are formed by the groups to generate employment and improve their living standards. They provide microfinance services to develop and improve their own communities. Each member’s eligibility for the loan depends on his/her member’s performance as these services are allocated through member groups.

4. Non-Governmental Organizations
NGOs are non-profit organizations that offer microfinance services such as insurance, loans etc and work towards social welfare. They help the poor and underprivileged by improving their living situation and also assist them in education, training, medical care and research. NGO’s mainly augment donations and funds from external sources and provide their services to the needy. NGOs operate locally and globally through online platforms and offline platforms.

5. Joint Liability Group
This type of lending system comprises of 5 to 10 members who jointly borrow from an MFI and are jointly liable for each other’s borrowing meaning if one member fails to repay the other members have to repay the loan.

Steps Of Microfinance Registration In India

To register as a Micro Finance Company with Registrar of Company (ROC) as NBFC MFI, the following are the steps:

Step 1: Register as a Private or Public Limited Company and then get Registered as an NBFC microfinance company

Step 2: Invest a capital worth a minimum of Rs. 1 lakh and have at least 2 members for Pvt Ltd and Rs. 5 lakhs for Public Ltd.

Step 3: Capital of net owned funds of at least Rs. 5 crores must be arranged and raised in the bank as a Fixed Deposit to acquire a NO LIEN certificate from the bank

Step 4: Next apply for NBFC License by filling and depositing an online application form to the Registrar of Companies and submit the hard copy of the License to RBI

Step 5: After submission and approval from ROC, get NBFC Registration Certificate in 10 to 15 working days.

Benefits Of Microfinance Company Registration

Collateral Free Loans:
The biggest advantage of the Microfinance service is that unlike banks it doesn’t require collateral against loans. The registration process is hassle-free and simple as it requires minimum documentation, which makes them a suitable option for quick raising of fund.

Disburse Loans under Emergency:
Any person might face a certain financial emergency at any point in time. With microfinance companies, it is easier to borrow without providing collateral and receive protected funds.

Provide financial aid:
Microfinance is emerged to empower the underprivileged of society by providing financial aid. The poor people are most in need of small loans for sustenance. The MFIs has emerged as a solution to alleviate poverty in rural India.

Provide various types of loans:
Microfinance companies in India are not only restricted to providing emergency loans or small loans but are also capable of providing business loans, working capital loans, and loans for home building with minimal processing fees and formalities.

Promote Self-sufficiency and Entrepreneurship:
In India, Microfinance Companies can offer requisite funds to an individual for establishing a business that requires low investment. They help ensure self-sufficiency among the lower-income group.

It can Create employment:
Microfinance companies aid in creating more job opportunities, especially for women. As it provides loans to small businessmen, small farmers, for starting a business or a profession, people are exposed to new job opportunities.

Promotes Women Empowerment:
With the majority of microfinance clients being women, there have been changes in terms of women's empowerment and gender equity with the emergence of microfinance companies in India. Women have savings in their name, they have direct engagement in credit disbursements and repayments, they are provided opportunities for social mobilization and skill development, especially through the group-based models ultimately building women leadership.

Eligibility Of Microfinance Registration

The eligibility criteria for registration of microfinance companies are as follows:

  • Registration either under the Companies Act 2013 or Companies Act 1956
  • Net owned funds of Rs 5 crores minimum for NBFC microfinance and no minimum amount required for Section 8 microfinance companies
  • Provision of loans only between Rs 50 thousand to Rs 1.25 lakh
  • Submit details on members
  • Minimum 85% Qualifying Assets out of Net Owned Funds
  • No Minimum Capital required

Documents Required For Microfinance Company Registration

Microfinance Company Registration in India requires the following documents:

  • A copy of the Incorporation Certificate
  • PAN Card of the Applicant Company
  • PAN Card of the members
  • Digital Signature Certificates of the members/directors
  • Director Identification Number or Directors
  • Latest Passport-sized photographs for all Directors/Members
  • Address Proof of the Registered Office
  • A copy of the Rental Agreement or Lease Deed, in case leased
  • A copy of the Ownership or Sale Deed, in case it is a self-owned property
  • Certified copy of MOA that is Memorandum of Association
  • Certified copy of AOA that is Articles of Association
  • Banker's Report (financial statements)
  • A copy of the Board Resolution regarding purchase of shares
  • Auditors Report mentioning the minimum Net Owned Funds
  • Compliance Certificate from a certified Chartered Accountant
  • Complete Business Plan
  • Income Certificate of the KMP (Key Managerial Personnel) and Directors

How To Register Microfinance As An NBFC

To register a microfinance company as NBFC, following are the requirements:

  • Experience of Director: minimum 10 years in Finance Sector
  • Total Number of Members: For a Public Limited, at least 5 members are required, and for a Private Limited Company (Pvt.), a minimum of two members are required.
  • RBI Approval: Mandatory approval from RBI
  • Adhering to norms: It has to comply with all NBFC rules
  • Organisation Status: Profit-making organisation
  • Loan Limit: Maximum of 10% of total assets
  • Net Owned Funds: Minimum 5 crores
  • Difficulty in Microfinance Company Registration: It is mandatory to execute and complete all the steps of incorporation and registration

How to Register Microfinance As An Sec-8 Company

A microfinance company requiring to be registered under Section 8 has the under mentioned criteria:

  • Experience of directors: No previous experience required
  • Total number of members: Minimum two members are required
  • RBI approval: No mandatory requirement of RBI approval
  • Adherence to norms: Adherence to RBI norms are required to certain extent
  • Organization status: Non profit organizations
  • Loan limit: Rs. 50,000 to Rs. 1.25 lakhs
  • Net owned funds: No minimum amount required
  • The difficulty in microfinance organization registration: comparatively simple and hassle-free

Process For Registering A Section 8 MFI In India

  • Apply for DSC and Approval of name: You are required to apply for a Digital Signature Certificate (DSC) as early as possible. And your proposed name of the company must contain words like Foundation, Society, Association, Council, Club, charities, Academy, organisation, Federation, Institute, Development etc.
  • Submit Section 8 Incorporation Documents on MCA Portal: After getting approval from the regional director, provide the section 8 company registration application with the required documents before ROC. After verification from ROC, a Certificate of Incorporation along with a Company Identification Number (CIN) will be issued.
  • MoA and AoA filing: After the License has been obtained, you need to prepare and submit the Memorandum of Association (MoA) and Article of Association (AoA) to file section 8 company registration applications.
  • File relevant documents: this is the last step where you must submit all the relevant documents along with the certificate of incorporation. PAN, TAN, identity and address proof, proof of ownership of registered office or rental agreement and other documents will be required.

Frequently Asked Questions

How did microfinance start in India?

SEWA also known as Self Employed Women's Association took the first initiative in introducing microfinance in Gujarat, in the year 1974 and established the SEWA Bank.

Who regulates MFI in India?

Reserve Bank of India regulates the microfinance sector.

Is microfinance good or bad?

Microfinance like every other organisation has advantages and disadvantages. But its main objective to provide financial services to the poor and underprivileged people has been effective. With constant support, it can alleviate poverty to a considerable extent.

How do microfinance companies make money?

Microfinance Institutions borrow from large banks and investors and also issue bonds, accept equity investments and deposits from clients.

What is qualifying assets in MFI?

It requires at least 85% of its Total Net Assets in the form of Qualifying Assets.

What is the difference between NBFC and MFI?

NBFCs perform functions that are quite similar to the banks in the regions where banks are not available. Microfinance institutions operate at a level smaller than NBFC and give loans of small amounts, deals with a poorer section of the society.

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