The microfinance segment in India has proved to be fundamental for promoting financial inclusion by extending credit to low-income groups that are traditionally not catered to by lending institutions. The essential features of microfinance loans are that they are of small amounts, with short tenures, extended without collateral, and the frequency of loan repayments is greater than that for traditional commercial loans. These loans are generally taken for income-generating activities, although they are also provided for consumption, housing, and other purposes.
There exist various market players in the microfinance industry viz. scheduled commercial banks, small finance banks, co-operative banks, various NBFCs extending microfinance loans, and NBFCs-MFIs.
As per the RBI Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, a microfinance loan is defined as follows:
Registration Norms for Microfinance
A Microfinance company can be registered in two ways:
- As a Non-Banking Finance Companies (NBFC) duly registered with RBI
- As a Section 8 company (companies formed under Section 8 of the Companies Act 2013)
Pre-requisites for Registration
| Pre-requisites | NBFC | Section 8 Company |
|---|
| Approval of RBI | Mandatory | Not Required |
| Net Owned Funds | Minimum 5 crores | No minimum requirement |
| Director Experience | One director must have experience of more than 10 years in financial services | No prior experience required |
| Limit on Loans | Maximum of 10% of total assets | Unsecured loan of Rs. 50,000 to small business loan up to Rs. 1.25 lakh to dwelling residence |
| Complexity of Registration | All processes involved in forming a company have to be performed. | Relatively simple as it is registered as a non-profit organization |
| Adhering to Compliances | It has to adhere to all compliances of an NBFC. | Adhere to compliance of RBI, but they are less stringent in comparison to NBFC |
| Number of Members | Private limited: minimum of 2
Public limited: minimum of 7 | Minimum of 2 members |
| Status of Organization | Profit organization | Non-profitable organization |
Registration Process of a Microfinance Company as an NBFC
The provisions of Master Direction—Reserve Bank of India (Non-Banking Financial Company—Scale Based Regulation) Directions, 2023, shall apply to NBFC-MFI.
i. Net Owned Fund (NoF) Requirement
| NBFCs | Current NOF | By March 31, 2025 | By March 31, 2027 |
|---|
| NBFC-MFI | Rs. 5 crore (Rs. 2 crore in NE Region) | Rs. 7 crore (Rs. 5 crore in NE Region) | Rs. 10 crore |
ii. Principal Business Criteria
A company will be treated as an NBFC if its financial assets are more than 50 percent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 percent of its gross income. Both these tests are required to be satisfied as the determinant factor for determining the principal business of a company.
iii. Steps for NBFC Registration
- Register a company: Form a private or public company with a capital of Rs. 10 crore.
- Deposit the capital: The capital must be deposited in a bank as a fixed deposit, and a ‘No lien’ certificate must be obtained.
- Apply for a license: Fill out an online application for the license and submit all certified documents.
Required Documents for NBFC Registration:
- Memorandum of Association and Articles of Association
- Incorporation certificate of the company
- Board resolution copy
- Copy of Auditor’s report of receipt of fixed deposit receipt
- Banker’s Certificate of No Lien stating the net owned fund
- Banker’s report about the company
- Recent credit report of the directors
- Net worth certificate of the directors
- Education/professional qualification proof of the director
- KYC and income proof of the director
- Proof of work experience in the financial sector
- Structure plan of the organization
Registration Process of a Microfinance Company as a Section 8 Company
- Application for Reserving the Name of a Company through Company Incorporation SPICE Forms – Select the Form – RUN/Spice Plus
- Incorporating a company through Simplified Proforma for Incorporating Company electronically (SPICe -INC-32), with eMoA (INC-33), eAOA (INC-34).
Required Documents for Section 8 Registration:
- Digital Signature Certificate (DSC) for all Directors and individual shareholders
- Director Identification Number (DIN) (if unavailable, it can be applied during incorporation)
- PAN Card copy of all directors/promoters
- Documents for identity proof
- Documents for address proof
- Photograph of all directors/promoters
- Proof of ownership of registered office or rental agreement
- NOC from the owner
- Applicable stamp duty as mandated by the state
- Any other documents as required
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