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Micro Finance Company
Microfinance is simply the range of financial services, including loans, savings, and insurance. These services are extended to small business owners and poor entrepreneurs who have no collateral & marginal money and wouldn’t otherwise qualify for a bank loan from the regularised banks with their stringent processes.
Most often, these microloans are given to those who are working in different trades, including farmers, agriculturists, fishing, carpentry, and transportation, etc.
The amount of loan is small (or micro), of up to Rs. 50,000 in rural areas and Rs. 1,25,000 in urban areas. Hence the name of Micro Finance.
The majority of their clients are based in villages and remote areas, where access to formal banking is non-existent. Microfinance companies are entitled to take only the reasonable rates of interest as recommended by the central government and RBI. Also, plenty of related facilities are offered by them to the borrowers regarding repayment.
At least 70% of the total amount of loans extended by these financing institutions must be aid generation of income. They have been a great supporter of rural development, employment.
Categories of Micro Finance Company
In India, there are diverse models of Microfinance companies. Generally, a finance business is authorised only to Non-Banking Finance Companies (NBFC). It has to be registered with the Reserve Bank of India (RBI). However, some other entities have also been exempted by the RBI to do activities of financing & loan, and are subject to specific regulations. They are to be registered under different regulator and does not need RBI approval. These are based on the form of the entity they choose to be registered as and under the regulatory authority.
A Microfinance company can be registered as any of the below organisation:
NBFC-MFI (Micro Finance Institution)- registered as a company under the Companies Act and then enrolled with RBI as NBFC-MFI.
Co-operative Society- (registered under the Co-operative Societies Act 1912 and governed, generally, by the State Government)
Section 8 Company- (established under the Companies Act 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).
Let’s understand their features in detail here:
|Features||NBFC-MFI||Section-8 Company||Society & Trust||Co-operative Society||Nidhi Company|
|1.||Registration Under||Companies Act & RBI||Section-8 of the Companies Act||Societies Registration Act, and/or Indian Trust Act||State Cooperative Societies Act as Applicable||Section-406 of the Companies Act|
|2.||Minimum Capital||Minimum net owned funds (NOF) of Rs. 5 crores. (Rs. 2 crores for North Eastern)||No minimum required||No minimum required||No minimum required||No minimum required|
|3.||Client Base||Lower Income group||Non-Commercial Banking and NPO||Members with a common interest||Non-Commercial Banking and NPO||Lower Income Group|
|4.||Rate of Interest||Consider the lower of: |
• The average base rate of 5 largest commercial banks multiplied by 2.75 per annum, and
• Cost of funds plus a 10% margin cap of 10% for MFIs with a loan portfolio of more than Rs. 100 crore and 12% for those with a loan portfolio of less than 100 crore
|Same as NBFC-MFI||Determined and Accepted by the Members at General Meeting and by the Committee||Determined and Accepted by the Board of Directors||Maximum Rate of Interest on Loan must not be more than 7.5% + Maximum rate offered on deposits.|
Choosing the Right Company Structure
Micro Finance Companies functioning under different regulatory authorities must get properly registered with appropriate agency and obtained necessary licenses/ permits. And they must have a minimum net worth of as prescribed by the Regulator.
Other local initiatives are active in dispersing microcredit. They may have diverse models, such as Self Help Groups (SHG), Joint Liability Groups (JLG), Individual, Limited Liability JLGs, etc. Under these, groups of people pool their savings, to arrange finance for projects of one or more of their members. However, But have no legal standing. MFIs are subject to laws as per their structure. A microfinance bank will have to follow the banking regulations and will be supervised by the same oversight authorities as other banks. NGOs and cooperatives are regulated by other oversight authorities.
The most common structure of microfinance companies getting registered in India is NBFC-MFI (NBFC) and Section 8 Company. NBFC-MFI, which has to be registered with the RBI after it is incorporated as a company. And has to fulfill the requirements of minimum NOF, you will require at least Rs. 5 crores. The other is registered as Section 8 Company. It is the most convenient option because RBI approval is not mandatory. There is no requirement of holding a minimum capital. The registration cost as well as RBI compliances are much fewer.
You can get all these kinds of institutional set-ups registered with CompanyRegistrationOnline, we’ll discuss about the registration of your microfinance company as a Section 8 Company here.
Micro Finance Company Registration Process
Conditions for Microfinance Company Registration
Registration Under: Companies Act, 2013.
License: Section 8 Company License to be applied to MCA.
Directors: Minimum 2 Directors for a Private Limited Company and 3 Directors for Public Limited Company must be there. The maximum limit is 15 Directors. More Directors can be appointed after passing a special Resolution in a general Meeting.
Indian Resident: At least 1 Director must be a resident of India (ROI), i.e., having stayed in India for at least 182 days in the previous calendar year [(Section 149(3)].
Subscribers to MoA: If the business is proposed to be established as a private company or public company, its MoA must have at least 2 or 3 subscribers, respectively.
MoA & AoA: The objective of the Company, name to be applied for, planned registered office address, number of Directors and promoters, authorized capital, and number of shares to be subscribed by each promoter. The plan laid-out to meet your social objectives must be mentioned in them. The ROC is entitled to ask about it.
Initial Capital: In case initial capital has been proposed for the Company, it must get invested in the Company’s bank account within 2 months.
Property Management: The ownership of the property lies in the name of the Company and it can only be sold following 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: Requirement of filing of accounts, statements and the returns of the company with the ROC are compulsory to be fulfilled.
Documents: All the Directors must have their own valid DIN & DSC
- ID Proof (PAN Card, Passport, Voter ID, or Driving License),
- Address Proof (Aadhaar, Passport, or utility bill not older than 2 months),
- 2 passport Sized Photographs,
- Self-declaration about directorship in other companies.
Address Proof (either House tax for owned property or Rent Agreement & NOC from landlord if the premises is rented)
Why to register as a Microfinance Company
Some of the working mechanism of micro-finance companies are as follow:
Credibility: A microfinance business registered with the Companies Act make them trustworthy, due to being regulated and audit requirements, etc
Reduced Compliances: Though the company would have to comply with RBI standards even if it is not required to register with it. But no approval from RBI is needed. It is not easy to get registered with RBI and takes a long time as well. Not to mention the costs involved.
Distinct Legal Identity: The Company will have a separate legal entity. Its legal standing will be different from its members and perpetual existence. Along with organized operations and greater flexibility.
Reduction in Stamp Duty: There is relaxation in Stamp Duty for MoA, AoA, and other documents, as per State government rules.
No Minimum Capital Requirement: No requirement for minimum capital of Rs. 2 Crores. Moreover, the capital structure can be altered at any stage as per the growth requirements of the company. So it can be formed without any share capital. The funds required for business operations can be brought, later, in the form of donations and/or subscriptions from members and the general public.
CARO: Provisions of Companies Auditor’s Report Order or CARO do not apply to this type of company.
Limited Liability: The liability of the members is limited to the extent of unpaid shares held by them and nothing more. Therefore, if any liability rises, the members of the company are not personally affected.
Greater Flexibility: A Microfinance company is also exempt from performing many legal formalities as a public company. It enjoys the special privileges under the company law. Such as hiring Company Secretary or maintaining records of meetings, etc.
Tax Benefits: Many tax benefits are granted to Micro Finance Companies in India.
Exemption to the donors: The donors are eligible for tax exemptions u/s 12A and 80G of the Income Tax Act.
Noble Cause: The main objective of Micro Finance Company is to promote socio-economic growth. To bring sustainable development of the backward sections of the society.
CompanyRegistrationOnline will assist you at all steps of registering your microfinance company. With over 11 years of experience in the field of company registration and compliances, we’ll relieve you of going through the complex procedure of completing papers, selecting and searching availability of name, logo or trademark designing, trademark registration, etc.
We are a company driven to help people with noble causes. If you wish to start a Microfinance business in India and promote social wealth.
We offer all kinds of services for conditions to be met before and after business registration. For any queries on related topics, you can consult here. We provide well-informed Legal, Registration and Financial Services related to Professions and Companies.
Loans & Rate of Interest
The interest rate that a microfinance section 8 company can charge would be lower of below:
|(1) The average base rate of 5 largest commercial banks multiplied by 2.75 per annum.||OR||(2) The cost of funds plus a margin cap of 10% for MFIs having a loan portfolio above Rs. 100 crore and 12% for those below Rs. 100 crore.|
RBI advises the average of the base rates of 5-largest commercial banks on the last working day of the previous quarter. And this fixes the interest rates for the ensuing quarter.
Therefore, the charges have been made dynamic because they are now linked to the actual cost of funds to the lender.
**And the processing fees must not exceed 1% of the gross loan amount.
The maximum amount of loan can be up to Rs. 50,000/- for small businesses and residential dwellings is Rs. 1,25,000/-.
Processing charge cannot be charged more than 1% of the Gross Loan Amount.
Insurance premiums cannot be more than the actual cost.
The interest on the loan to be charged on decreasing balance method.
Microfinance companies are to show in all the offices or literature, the effective rate of interest.
A loan card is issued to all borrowers mentioning the interest rate, and other terms & conditions.
Loans are also provided in self-help groups (SHG) and other such group initiatives.
Frequently Asked Questions
2. File for DIN
3. Obtain Certificate of Incorporation
4. PAN & TAN Application
• Aadhar Card
• Address Proof (bank statement or utility bill),
• Passport Sized Photographs
• Ownership Proof (House tax receipt etc) – for owned premises
• Rent Agreement & NOC – for rented premises
• Government support in terms of relaxation on taxes and duties
• Convenient registration norms and fees
• No minimum capital requirement
1. Conducting at least 2 Board Meetings in a year.
2. Audit of Accounts.
3. Annual Returns filing to ROC.
4. Income tax returns.
5. Additional compliances to be fulfilled with the registration u/s12AA, 80G, of the Income Tax Act, applicable to donations, etc.
And the average of the base rates of 5-largest commercial banks is advised by RBI on the last working day of the previous quarter, which determines interest rates for the ensuing quarter.
Therefore, the charges vary because they are now linked to the actual cost of funds to the lender.
And the processing fees must not exceed 1% of the gross loan amount.