Microfinance Companies in India - Setup via NBFC or Section 8 Companies

• Microfinance is a banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services.
• It allows people to take on reasonable small business loans safely, and in a manner that is consistent with ethical lending practices.
• Like conventional lenders, micro financiers charge interest on loans and institute specific repayment plans.
• In many instances, people seeking help from microfinance organizations are first required to take a basic money-management class.
• Lessons cover understanding interest rates, the concept of cash flow, how financing agreements and savings accounts work, how to budget, and how to manage debt.

Following are the main objectives of Microfinance Company:

• To give an opportunity to people in the low-income group to become self-sufficient.
• Offer banking services at small monetary amounts.
• To provide financial assistance to individuals who work in varied trades like transportation, fishing, carpentry etc.
• Offer financial assistance to small enterprises that can not afford any collateral.
• Increase the participation of women in generating sustainable livelihood.
• Provide access to quality healthcare.
• Increase and enrich the mode of livelihood for low-income individuals and creating opportunities for self-employment.

A company registered with RBI with a motive to run a microfinance institution is known as NBFC –MFI (Microfinance Company). If any NBFC needs deposits, then it needs to get a separate status from the Reserve Bank of India (RBI). To get the deposit taking status, a separate application needs to be filed with the Reserve Bank of India (RBI).

Basic features of registering Microfinance company as NBFC

• One of the directors should have an experience of more than ten years in financial services.
• Minimum Funds of Rs.5 crore and Rs.2 crore for registered in North-Eastern states.
• Cannot accept security deposits.
• It should have a CIBIL membership and Credit Information Companies membership.
• It has to be a member of one of the self-regulatory organisations in the country.
• Should not extend loans to microfinance sectors more than 10% of the total assets.

Process of registering Microfinance Company as NBFC

• Register a Company: The First and very important step to start a Microfinance Company is to register the Company. The company can be registered as a Private Limited company or Public Limited Company.
  Documents required to register NBFC as Private Limited Company:
• Copy of PAN CARD
• ID Proof (Driving License, Passport, Aadhaar Card, Voter ID)
• Address Proof (Bank Statement, electricity bill, Mobile Bill, Telephone Bill)
• Passport Size photo
• Rent agreement or ownership documents
• Electricity bill
• A copy of No Objection Certificate (NOC) from the owner

Registering as Section 8 Company the cheapest way to register a Microfinance Company in India. If you are interested in starting a micro finance business, then you might start with a section 8 company.

Basic features / Advantages of registering Microfinance company as Section 8 Company

• RBI approval is not required at all.
• No minimum funds of 2 crores.
• The registration cost is under Rs.47,000/-.
• Lesser compliances as compared to the NBFC.
• Can give unsecured loan to small business of Rs.50,000.
• Can give loan for dwelling residence up to Rs.1.25 lakh.

Process of registering Microfinance Company as Section 8 Company

If you're looking to start a microfinance business with minimal capital and lower regulatory burden, registering as a Section 8 Company is the most cost-effective and efficient option. Here's a step-by-step guide to help you understand the complete registration process:

• 1. Apply for DSC and DIN: The first step is to obtain a Digital Signature Certificate (DSC) for the proposed directors. This can be done through any certified authority. After securing the DSC, apply for Director Identification Number (DIN) via eForm DIR-3 on the MCA portal.
• 2. Name Approval: Submit a name approval request using the RUN (Reserve Unique Name) service on the MCA portal. The name should reflect the charitable nature of your business and may include terms like Foundation, Sanstha, or Micro Credit.
• 3. Draft MOA and AOA: Once the name is approved, draft the Memorandum of Association (MOA) and Articles of Association (AOA). These documents define your company’s mission, vision, and internal governance structure.
• 4. Apply for Central Government License: Submit eForm INC-12 along with the drafted MOA, AOA, and supporting documents to apply for a license under Section 8 from the Central Government. You'll also need to prepare an estimated income and expenditure statement for the next three years.
• 5. Incorporation Application: After receiving the license, file the SPICe+ (INC-32) form for company incorporation. This includes uploading all documents related to the directors, office address, and declarations.

Documents Required:

• PAN Card, Aadhaar/Passport/Driving License/Voter ID of all promoters
• Property ownership documents or rent/lease agreement of registered office
• Latest electricity bill (within 2 months)
• Income Tax returns of the promoters (optional but recommended)

• 6. Certificate of Incorporation: Once verified, the Registrar of Companies (ROC) will issue a Certificate of Incorporation along with a Company Identification Number (CIN).
• 7. PAN and TAN Allotment: After incorporation, the company is automatically allotted a PAN and TAN by the Income Tax Department. The physical copy of the PAN is sent via speed post to the registered office address.

Whether you start a Microfinance company through NBFC or Section 8 company, what we need to do is to have faith in microfinance. Though there are challenges but one can overcome this with creating their own market. And section 8 companies are the best way to do so.