Microfinance Company Registration

A Microfinance Company is a small financial institution that provides loans to SMEs and others who lack access to bank credit.

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Overview

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:

Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022

A “NBFC-MFI” means a non-deposit taking NBFC which has a minimum of 75 percent of its total assets deployed towards “microfinance loans”.

Registration norms for Microfinance

A Micro finance company can be registered in two ways:

  • As a Non-Banking Finance Companies (NBFC) duly registered with RBI
  • As a Section 8 companies (companies formed under Section 8 of the Companies Act 2013)
Pre-requisitesNBFCSection 8 Company
Approval of RBIMandatoryNot Required
Net owned Minimum 5 coresNo minimum requirement
Director experienceOne director must have experience of more than 10 years in financial servicesNo prior experience required
Limit on loansMaximum of 10% of total assetsUnsecured loan of Rs. 50,000 to small business loan up to Rs. 1.25 lakh to dwelling residence
Complexity of Microfinance Company RegistrationAll processes involved in forming a company have to be performed.Relatively simple as it is registered as a non-profit organization
Adhering to CompliancesIt has to adhere to all compliances of an NBFC.Adhere to compliance of RBI, but they are less stringent in comparison to NBFC
No of membersFor a private limited company minimum of 2 For a public limited company minimum of 7Minimum of 2 members
Status of organizationProfit organizationNon-profitable organization

Registration Process of a Microfinance company as an NBFC

As both the models of microfinance companies are different from each other, the registration process is also considerably different. The following are the steps involved in the registration of a microfinance company through 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.

1. Net Owned Fund (NoF) Requirement

The following glide path is provided for the existing NBFC-MFIs to achieve the NOF requirement of Rs. 10 crore:

NBFCsCurrent NOFBy March 31, 2025By March 31, 2027
NBFC-MFIRs. 5 crore (Rs. 2 crore in NE Region)Rs. 7 crore (Rs. 5 crore in NE Region)Rs. 10 Croe

2. Principal Business Criteria

A company will be treated as an NBFC, if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 per cent of its gross income. Both these tests are required to be satisfied as the determinant factor for determining principal business of a company.

3. Register a company:

The first step in registering as a Non – Banking Financial microfinance company is to form a private or public company. A private company requires at least 2 members and a capital of Rs. 10 Crore. A public company requires at least 7 members.

4. Deposit the capital

Upon the collection of capital, the next step is to deposit the capital in a bank as a fixed deposit and obtain a ‘No lien’ certificate for the same.

5. Apply for license

Finally, the NBFC must fill out an online application for the license and submit it along with all the certified documents. A hard copy of the application and license must also be submitted at the regional office of the Reserve Bank of India. The documents that must be available with the NBFC at the time of filing are:

  • 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

Registration Process of a Microfinance company as a Section 8 company

  1. Application for Reserving the Name of a Company through Company Incorporation SPICE Forms – Select the Form – RUN/Spice Plus
  2. Incorporating a company through Simplified Proforma for Incorporating Company electronically (SPICe -INC-32), with eMoA (INC-33), eAOA (INC-34), is the default option and most companies are required to be incorporated through SPICe only.

The primary basic documents required for registering a company under both the models are:

  • Obtaining a Digital Signature Certificate (DSC) for all Directors and individual shareholders.
  • Director Identification Number (DIN): If unavailable, the same can be applied at the time of 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 for the same
  • NOC from the owner
  • Applicable stamp duty as mandated by the state
  • Any other documents as required

Compliances as per NBFC-MFI regulations

Every microfinance company is required to comply with a set of requirements. The same has been provided below:

Board approved policy

  • Flexibility on repayment periodicity
  • Indicative methodology for assessment of household income
  • Limit on the outflows on account of repayment of monthly loan obligations of a household as a percentage of the Monthly Household Income (MHI) which shall be maximum 50% of the MHI
  • Pricing of microfinance loans covering the following:
    • Interest rate model for an all-inclusive interest rate
    • Delineation of interest rate such as cost of funds, risk premium, margin etc.
    • Range of spread of each component
    • A ceiling on interest rate
  • • Conduct of employees and system for their recruitment, training and monitoring
    • Minimum qualifications for staff
    • Provide necessary training tools to deal with customers

Training to include programs to inculcate proper behavior towards customers

Submission of information to CICs

  • Ensure compliance with the level of indebtedness
  • Ascertainment of the above also from other sources such as bank account of borrower, bank account statements and local enquiries

Disclosure

  • The Company shall disclose pricing related information to prospective borrower in a standardized simplified factsheet
  • Any fees charged to the borrower shall be disclosed in the factsheet
  • Display the minimum, maximum and average interest rates charged on MF loans in all its offices, booklets, websites, supervisory returns
  • Changes in the interest rates, if any, to be informed to the borrower

Fair Practice Code

  • Displayed on the website of the Company

Mechanism

  • Identification of borrowers facing repayment related difficulties
  • Engagement with borrowers and providing necessary guidance
  • Redressal of recovery related grievances

Due Diligence Process

  • Process for engagement of recovery agents
  • Up-to-date details of recovery agent to be hosted on the website of the company

FAQ's

Central KYC Registry is a centralized repository of KYC records of customers in the financial sector with uniform KYC norms and inter-usability of the KYC records across the sector with an objective to reduce the burden of producing KYC documents and getting those verified every time when the customer creates a new relationship with a financial entity.

Central KYC Registry has the below salient features:

  1. Facilitates uniformity & inter-usability of KYC records & process across the financial sector.
  2. Unique KYC identifier linked with independent ID proofs.
  3. Substantial cost reduction by avoiding multiplicity of registration and data upkeep.
  4. KYC data and documents stored in a digitally secure electronic format.
  5. Facilitates KYC Search, Upload, Download, Update.
  6. Secure and advanced user authentication mechanisms for system access.
  7. Data de-duplication to ensure single KYC identifier per applicant.
  8. Real time notification to institutions on updation in KYC details.
  9. Seamless file exchange processes without the need for manual intervention.
  10. API’s for search and download allow for real time account opening for CKYC compliant customers.

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