What are Micro Finance Institutions?

Microfinance is a banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services. Microfinance allows people to take on reasonable small business loans safely, and in a manner that is consistent with ethical lending practices. Like conventional lenders, micro financiers charge interest on loans and institute specific repayment plans. Microfinance services are provided to unemployed or low-income individuals because most of those trapped in poverty, or who have limited financial resources, do not have enough income to do business with traditional financial institutions. Unlike typical financing situations, in which the lender is primarily concerned with the borrower having enough collateral to cover the loan, many microfinance organizations focus on helping entrepreneurs succeed.

The Government of India is attempting to provide financial inclusivity in lower-income group areas also. To accomplish this goal, the Microfinance Institutions have become the overwhelming focus as they stretch out financial administrations to individuals of low-pay layers who plan to run a business.

India is a developing economy with an enormous population. Government banks and private area banks cannot open their branches in each town and village. However, Indian banks have expanded their essence yet they have restricted reach in far off zones. Micro Finance Institutions (MFI) for the most part works in towns and far-off territories for individuals and small businesses in such remote areas.

Features of Micro Finance Institutions?

The microfinance sector has grown rapidly over the past few decades. Microfinance is a unique economic development tool that has helped crores of underprivileged people. The key features include:

  1. The borrowers are generally from low-income backgrounds
  2. Loans availed under microfinance are usually of a small amount, i.e., microloans
  3. The loan tenure is short
  4. These loans are usually repaid at higher frequencies
  5. The purpose of most microfinance loans is income generation
  6. Loans are offered without collaterals
  7. High frequency of repayment

Advantages of Micro Finance Institutions?

  1. Collateral-free loans: Most of the microfinance companies seek no collateral for providing financial credit. The minimum paperwork and hassle-free processing make them a suitable option for quick fundraising.
  2. Disburse quick loan under urgency: The financial crisis is inherently unpredictable as it could creep up at any point in time without intimating anybody. Thanks to microfinance companies that can provide secure and collateral-free funds to an individual in a demanding situation to meet their financial need.
  3. Help people to meet their financial needs: The renowned financial institute provides unparalleled services when it comes to loans or credit. But the worst part is that they are not accessible to low-income groups. Microfinance companies, however, offer different proposition altogether. They are dedicated to serving poor and unemployed individuals by providing them easy financial credit.
  4. Provide an extensive portfolio of loans: Microfinance companies are not only limited to providing emergency credit but also capable of disbursing housing loans, business loans, and working capital loans with minimum formalities and processing.
  5. Promote self-sufficiency and entrepreneurship: Microfinance companies can provide much-need funds to an individual for setting up a healthy business that seeks minimum investment and offers sustainable profit in the long run. Thus, these companies ensure entrepreneurship and self-sufficiency among the lower-income group.

Categories of Micro Finance:

Microfinance can be broadly categorized into 3 types, based on products:

  1. Micro-loans: Microfinance loans are altogether not the same as others as these are given to borrowers with no security. A definitive point of these microloans is to have its beneficiaries grow out of more modest credits and be prepared for conventional bank loans.
  2. Micro-savings: Micro bank accounts are a unique idea as they permit business people to work bank accounts with no base amount. The principal goal of such accounts is to assist clients with instilling money-saving habits and build up financial discipline to be ready for the future.
  3. Micro-insurance: Microinsurance is an interestingly planned protection scheme given to borrowers of microloans and its unmistakable component is that these protection plans have a lower premium than conventional insurance plans.

Different types of Micro Finance Businesses in India:

Micro Finance Institutions (MFIs) in India plays a significant role in development, as they enable low-income individuals and furthermore stretch out financial help to all networks and locales. In this manner, in offering help to a huge number of individuals to satisfy their goals and aspirations, these MFIs not just assist in the financial development of the nation, but additionally in reasonable dispersion of wealth all around.

Some of the prominent types of Micro Finance businesses in India are:

  1. NBFC-MFI (Non-Banking Financial Company)
  2. Section 8 Companies
  3. Cooperatives and Mutually aided cooperative societies
  4. Societies and Trusts
  5. Nidhi Company

Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)

Reserve Bank of India (RBI) defines NBFC-MFI as a non-deposit taking company under NBFC microfinance company registration with Minimum Net Owned Funds of Rs.5 crores. For NBFC incorporation of MFIs in the North Eastern Region of the country, the Minimum Net Owned Funds specified is Rs. 2 crores. Business Activities include Loans & advances, acquisition of shares/ stocks/bonds/ debentures/ securities that are issued by govt or local authority, or other marketable securities of similar nature, like leasing, hire-purchase, insurance business, chit business, etc.

NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

  1. Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding 1,00,000 or urban and semi-urban household income not exceeding 1,60,000;
  2. Loan amount does not exceed 50,000 in the first cycle and 1,00,000 in subsequent cycles;
  3. The total indebtedness of the borrower does not exceed 1,00,000;
  4. Tenure of the loan not to be less than 24 months for loan amount in excess of 15,000 with prepayment without penalty;
  5. Loan to be extended without collateral;
  6. The aggregate amount of loans, given for income generation, is not less than 50 percent of the total loans given by the MFIs; the loan is repayable on weekly, fortnightly, or monthly installments at the choice of the borrower

Modes to register a microfinance company:

  • Through NBFC- It requires a minimum capital of INR 5 crore.
  • Through Section 8 of Companies Act, 2013- No minimum capital is required.

In this article, we shall primarily focus on registration through NBFC.

Registration through NBFC:

To start a microfinance company as NBFC, one has to get a license from the Reserve Bank of India under Section 45I(a) of the RBI Act, 1934 and this whole process may take months to complete.

A company desirous of commencing the business of non-banking financial institution should comply with the following:

  1. It should be a company registered under section 3 of the Companies Act, 2013.
  2. It should have a minimum net owned fund of INR 2 Crore.

The following steps are involved in the registration:

  1. Registration:

The first step to start a microfinance company is to register the company as a private or public company under the Companies Act. Initially, the company can be registered with INR 1 Lakh.

  1. Capital:

The minimum net worth required to register an NBFC is INR 2 Crore. So the next step is to raise the share capital both authorized and paid up to the required amount.

  1. Fixed Deposit:

The next step is to get to deposit the sum of INR 2 crore in the Fixed Deposit in a freshly opened account and get a ‘no lien’ certificate from the bank. This certificate is needed when the application is filed with RBI.

  1. Documents Required for online application:

To fill the online application available on the RBI website, the following documents are required:

  • Duly certified Copies of Certificate of Registration.
  • Certified copies of only the main object clause in the MOA relating to the financial business.
  • Copy of Board resolution along with the self-declaration on behalf of the company that the applicant company shall follow all the rules, regulations, and notifications issued by RBI.
  • A copy auditor’s report of Fixed Deposit receipt & bankers certificate of lien indicating balances in support of Net Owned Funds (NOF).
  • Bankers Report for Applicant Company, group companies.
  • Certified copies of the highest educational and professional qualifications of all the directors of the applicant company.
  1. Online Application:
  • Go to the provided link //cosmos.rbi.org.in.
  • Click on the “CLICK HERE” for company registration on the registration page.
  • A window will be displayed showing the excel application available for download.
  • Download the suitable application form (NBFC or SC/RC).
  • Fill up the application form.
  • Upload it to the same website.
  1. Submit the hardcopy to the regional office:

Once the application has been filed online, the hard copy of the application indicating the online CoA number along with the supporting documents shall be submitted to the concerned Regional Office by the applicant company. The company can always track the status of the application form by logging into the above-mentioned address using the CoA Number.

The total cost for NBFC registration is around INR 4-5 lakhs including professional fees and RBI fees.

Registration and maintaining the proper functioning of MFI can be a challenging task. If you are interested to start an MFI, you can always reach out to HBF Direct Ltd. for starting the MFI and we will make it a smooth experience for you. Contact Us.

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December 14, 2020

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