Microfinance Companies are the financial institutions that provide banking and small-scale financial assistance in the form of loan, credit or savings, etc. to low-income group and small businesses who face difficulties in accessing financial resources from big institutions and banks due to their complex structure.
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These companies help entrepreneurs in growing their businesses off the ground and they also help them to start a new business by providing them with the necessary capital and make them independent.
Microfinance Companies give loans to the borrower even who have no collateral. However, the interest rate on these loans is quite high as compared to other financial institutions due to risk of default. These companies are also known as Micro-credit, Micro-benefit organization.
Features of Microfinance Companies
The following are the features of Microfinance Companies:
- It provides financial services to the backward section of the society.
- It helps various low-income group to raise their standard of living by providing them financial assistance.
- These companies try to encourage self-employment and women empowerment in rural areas.
- These companies provide different types of loans such as housing loan, education loan, business loan, working capital loan, etc. to meet the credit requirements of backward section of society.
- It also provides a support to all rural and agriculture development as well as start-ups.
Advantages of operating as Microfinance company
- Provide an aid to rural areas- These companies provide loans to the people residing in rural areas as such companies have easy and better access to rural areas as compared to banks and other financial institutions.
- Minimum capital requirement- For establishing Section 8 microfinance company, no minimum capital requirement is there.
- Huge tax benefits- The tax benefits enjoy by such microfinance companies in India are quite high.
- Encourage low-income group- Microfinance companies generally focus on low-income group or women empowerment.
- Requirement of collateral is less- Microfinance Companies give loans to the borrower even who have no collateral.
Basic requirements for registering a microfinance company
The basic requirements that need to be complied for registering a microfinance company are as follows:
- Approval of RBI is mandatory if such company is registered through an NBFC but such approval is not required in case of Section 8 company.
- Minimum net owned funds of 5 Crore are required in case of NBFC microfinance company whereas no such requirement is there in case of Section 8 company.
- Minimum 10 years of director experience is required if the company is registered as NBFC but Section 8 company does not require any prior experience of director.
- Microfinance NBFC can give loan of Max 10% of its total assets whereas unsecured loan of Rs. 50,000 can be given to small business by Section 8 microfinance company.
- Formation of such NBFC microfinance company involves complex procedure as compared to formation of Section 8 company.
- Status of NBFC microfinance company is profit organization whereas status of Section 8 company is non-profitable organization.
Documents required to set-up microfinance company
The documents that are required to set-up Microfinance Company in India are as follows:
- Charter Document of the company such as Memorandum of association and Article of association of company.
- Resolution passed by the Board of Directors with respect to registration of Microfinance Company.
- Copy of Auditor report.
- Banker report
- Id, address proof and photograph of directors and shareholders.
- Certificate related to educational qualification of directors and KMP.
- KYC of directors and KMP.
- Copy of rent agreement and utility bills like electricity bill, water bill, telephone bill, etc. of directors and shareholders.
Ways to set-up Microfinance Company
There are two ways of forming Microfinance Company. These companies can be register either through a Non-Banking Finance Company (NBFC) duly registered with RBI or Section 8 Company.
- Procedure for registration of Microfinance company as NBFC
- Name reservation and registration of company- The application for reservation of name of microfinance company shall be made through Part A of E-form Spice+. All the information regarding name of the company and other related document needs to be submitted through Form Spice+. Further, for registration of the company as microfinance NBFC an application shall be submitted through Part B of E-form Spice+ with all the relevant documents. If microfinance private company is required to be form than minimum two members are required whereas minimum seven members are required to form a microfinance public company.
- Raising of capital- The next step after registration is to raise a minimum capital of Rs 5 Crore for formation of such microfinance company as NBFC.
- Opening of Bank Account- The applicant needs to open a bank account and deposit the amount of capital as a fixed deposit in such bank account. Further, ‘no lien’ certificate shall be obtained for the same and such certificate needs to be submitted to the RBI along with application.
- Application for obtaining license- All the certified documents such as Certificate of incorporation, no lien certificate, memorandum and article of association, etc. needs to be submitted online to RBI for obtaining license. After submitting application, an ‘application reference number’ shall be generated for reference.
- Submission of hard copy- After online submission of application, hard copy of the same shall be submitted to the RBI office. After satisfaction, RBI shall issue certificate of commencement of business.
- Procedure for registration of Microfinance company as Section 8 company
- Application for DIN and DSC- The first step to form a Section 8 company is to apply for DSC for authorizing E-forms and to apply for Director Identification number (DIN).
- Application for name approval- The application for name approval shall be made through MCA portal and such names of the company should contain words like Society, Foundation, Association, Club, organization, etc.
- Filing of all relevant documents along with MOA and AOA- All the required documents related to the formation of Section 8 company shall be submitted to ROC through Spice+. The charter documents like MOA and AOA shall also be drafted to file an application of formation of Section 8 company.
- Obtain license of Section 8 company- When registrar gets satisfied with all the requirements, it shall provide a license to the applicant to operate with Section 8 company.
Conclusion
Earlier the micro-finance companies were entitled to provide loans up to INR 50000 to the population residing in the rural areas and semi-urban areas of the country. Recently, the limit was increased up to 1.25 lakh rupees in rural and semi-rural areas and 2 lakh rupees for urban and semi urban areas. The micro-finance companies should charge a reasonable rate of interest for the borrowers as may be governed by the RBI.
