Register a “Non-banking financial company”
Microfinance institutions or MFIs are those financial institutions that are in the business of providing loans and other financial services on a smaller scale. They are in the business of extending small loans in rural areas and among lower-income people in urban areas. Some of the large scale MFIs, after qualifying certain criteria and being non-deposit taking entities, register as Non-Banking Financial Company (NBFC) and get governed by RBI (Reserve Bank of India). These NBFC-MFIs are also termed as “Last Mile Financiers”. RBI governs them to keep these NBFC MFIs healthy and accountable. They are to apply for NBFC License with RBI to get registered with it.
According to provisions of RBI only non-deposit taking NBFCs can get registered as NBFC MFI after meeting the following conditions:
An NBFC, not qualifying as an NBFC MFI, cannot extend loans in the micro-finance sector, of more than 10% of its total assets, in aggregate.
The only difference between an NBFC MFI and other types of NBFC is that while other NBFCs can operate at a very high level but MFIs can only cater to the lower level of social strata, who need microcredits.
After your company has been established and the minimum NOF arranged, the below procedure needs to be followed to get the NBFC MFI License for your company:
All new entities are to get incorporated as a company first. Therefore this may take a while longer – at least 2-3 months.
Those NBFCs that are already registered with RBI, and want to convert to NBFC MFI, are to seek registration with RBI, subject to the condition that they hold their NOF at Rs. 5 crore. If this condition is not fulfilled, they must ensure that loans extended to the Microfinance sector (individuals, Self Help Groups or Joint Liability Groups, etc.) shall be less than 10% of its Total Assets.
To encourage NBFCs operating in the 8 North Eastern States, the minimum NOF is to be maintained at Rs. 2 crore.
If the takeover transaction of the Target NBFC is falling under any of the above-mentioned situations, you need to apply to RBI for prior approval. Then your application needs to be accompanied by the following documents:
It is the capital that can absorb the losses without such an impact on the entity to cease trading,
The capital that can bear losses at the time of winding–up and so the depositor may not be completely protected.
**RBI can ask for more documents before certifying you eligible to become an NBFC-MFI. The above list is not exhaustive.
**If RBI asks for more documents, they must be submitted within 30 days. Otherwise, the application for CoR will be considered Null.
**RBI can ask for more documents before certifying you eligible to become an NBFC-MFI. The above list is not exhaustive.
**If RBI asks for more documents, they must be submitted within 30 days. Otherwise, the application to become an NBFC-MFI will be considered Null.
Only the assets originated on or after January 1, 2012 will have to comply with the Qualifying Assets criteria. Those existing before this date are reckoned towards meeting both the Qualifying Assets as well as the Total Net Assets criteria. These assets have been allowed to run off on maturity and not be renewed.
Net Assets” are total assets. Excluding cash, bank balances, and money market instruments.
“Qualifying Assets” are loans by an NBFC MFI, meeting below descriptions:
Loan disbursed to a borrower with a rural household annual income not more than Rs. 1,25,000 or urban & semi-urban household income not exceeding Rs. 2,00,000.
Loan amount shall not be more than Rs. 75,000 in the first cycle and Rs. 1,25,000 in subsequent cycles.
In total, not more than Rs.1,25,000 is to be lent to a borrower. Any loans taken to fulfill education and medical expenses shall be excluded while calculating the total indebtedness of a borrower.
For a loan of more than Rs. 30,000, the duration of the loan shall not be less than 24 months. With prepayment clause without penalty.
Loan offered without any collateral.
The repayment schedule to be chosen by the borrower, as either weekly, fortnightly or monthly instalments.
The aggregate amount of loans, given for income generation, not to be less than 50 % of the total loans given by the MFIs. And the balance amount of loans may be extended for other purposes such as housing repairs, personal expenses, education, medical, or emergencies,
The income earned from the balance of 15% of the Qualifying Assets shall comply with the provisions provided specified for it.
RBI decrees that every NBFC MFI has to become a member of at least one Credit Information Company (CIC) established under the CIC Regulation Act 2005. Present timely and correct data to the CICs and use the data with them to ensure compliance with the conditions concerning membership of JLG/SHG, level of indebtedness and origins of funds. Such membership will ensure compliance with most of these stipulations.
The Master Circular of July 01, 2015, issued for NBFCs on Corporate Governance, is applicable for NBFC MFIs as well.
To strive for improvement in the efficiency of the backend and back-office operations of the NBFC MFI. Keep updating their Information Technology and systems. To simplify procedures, achieve better control and reduce costs.
RBI has issued guidelines in the circular RPCD.CO.Plan BC.66/04.09.01/2010-11 dated May 3, 2011, issued by the Rural Planning and Credit Department (RPCD) of RBI titled “Bank loans to Micro Finance Institutions (MFIs). And it keeps updating the terms from time to time.
The margin cap for all NBFCs, irrespective of their size, must not be more than 10% for large MFIs (having loan portfolios over Rs.100 crore) and 12% for the others.
The interest rates charged by an NBFC MFI on its loans extended must be the lower of:
NBFC MFI will ensure that the average interest rate on loans during any financial year (FY) does not exceed the average borrowing cost during that FY plus the margin, as prescribed.
The interest rates charged by an NBFC MFI on its loans extended must be the lower of:
The condition of maximum variation permitted does not apply to loans being provided from the funding received by NSFDC (National Scheduled Castes Finance & Development Corporation). Such loans are to be directly credited to the borrower’s accounts with banks.
Any borrowing from NSFDC must be excluded while calculating the average cost of funds for the company. Estimate the price of the general credit, excluding the beneficiaries targeted by NSFDC. Proper records of funds received or lent out from NSFDC are to be maintained and disclosed in the balance sheet of the NBFC MFI.
NBFC MFI is to inform the concerned Regional Office of RBI of its being appointed as a channel agent by NSFDC within 30 days of getting appointed.
Many NBFC MFIs in the earlier state of Andhra Pradesh (now Telangana and AP) have had to keep aside fairly large amounts towards the non-performing assets. To reflect the true and fair picture of the financials of the NBFC MFI in the Balance Sheet, the provisioning made towards the AP portfolio is to be as per the current provisioning norms. Implying that the Prudential Norms laid by RBI are applicable to both SI-NBFC (Non-Deposit Accepting or Holding) and Non-SI-NBFC (Non-Deposit Accepting or Holding)..
The aggregate loan provision to be maintained by NBFC-MFI, from the non-AP portfolio, should never fall below:
All other provisions commanded for SI-NBFC or Non-SI-NBFC (Non-Deposit Accepting or Holding) apply to NBFC MFIs also. Except if specifically excluded.
The department of channelizing agents is to be considered a separate business entity. Their loans shall not be included while determining the minimum qualifying assets criteria of 85%.
The interest on such loans is also not to be included while calculating the difference between the maximum and minimum interest rates.
The cost of these funds is also not to be counted while determining the average cost of funds or the interest rates charged to borrowers.
Proper accounts and records for such loans as well as funding from concerned agencies shall be kept by the NBFC MFI. Disclosed separately in the financial statements.
All these loans are to be reported to CICs to restrict multiple borrowings of a borrower.
All other provisions commanded for SI-NBFC or Non-SI-NBFC (Non-Deposit Accepting or Holding) apply to NBFC MFIs also. Except if specifically excluded.