Hello, Welcome to our article on how to start a finance company in India. Without wasting your time, we can straightaway inform you that one of the most challenging tasks is to obtain a finance company registration licence in India. This is because any person will see you suspiciously with the finance word attached to your company name as you are doing some scam or fooling people with unwanted schemes. Furthermore, even the government looks at you suspiciously and thus would not so easily issue a financial licence.
Do you required huge money to start a finance company? No, its not true; it depends on what type of finance business you want to start, you can start mini banking firm in your area in just Rs. 5 Lac . If you are trying to do business in every city than maybe you need Rs. 2cr. But yes its true you can start with Rs. 5 lac and grow accordingly.
To understand why people look suspiciously at the finance sector, one needs to go through the past of finance firms in the 1990s when everyone was doing the finance business and fooling people around and doing rupee crore scam.
Let us understand how you can launch a finance business in India with this quick introduction and what the best possible choices you can make use of.
Type of Finance Companies in India
Non-banking financial companies (NBFC) are classified as companies involved in the finance industry. Finance may be carried out in different modes of industry, which are as follows:
- Non-Banking Finance Companies
- TCredit cooperative
- Nidhi Companies
- Producer companies
- Local Finance License
- Micro Finance via Section 8 route
Non Banking Financial Companies (NBFC) Loan Company
In India , the Reserve Bank of India ( RBI) regulates the registration of NBFCs and allows a minimum capital of Rs.2 crore (5 crores in the case of microfinance) to begin with. It is a big challenge to further acquire the RBI licence and it requires almost 5 to 6 months to get the full process completed. There is also no certainty that the RBI will award you a financial certificate. (we have a different kind of companies also in NBFC category but we are not going in that bigger segment)
Let us explore the benefits and drawbacks of NBFC registration:
Advantages of NBFC enrollment
- Most authentic choice for finance companies
- Proper licencing through the Reserve Bank of India
- Will run anywhere in India
- International funding should be approved to a certain limit.
Disadvantages of registration under the NBFC
- Excessively heavy capital needs
- Having an RBI licence is not easy.
- Quite High cost of compliance
Credit cooperative - Socities or Trust
Trust and society are one of India's most popular modes of financial industry. This is the perfect choice for someone who desires to start a finance company at a shorter level , i.e. at the district level. However, getting the company licence now a day is also getting difficult day by day and society registrars now do not grant the company licence in the face of frauds going on.
Here are the benefits and drawbacks of trust and society:
The advantages of Trust and Communities
- With reduced processing rates, it is possible to register.
- Smaller enforcement rate
- Possibility to accept deposits
Trust and Societies Drawbacks
- Can run up to district level
- With the election, control can be shifted.
- Can offer finance only to members
Nidhi Company - Small Banking Org
Nidhi Company's Registration is one of the simplest and most effective ways to start your Indian finance venture. The Nidhi Company will launch with a capital of 5 lakhs and can be registered in 15 to 20 days. Under this option, deposit and grant loans may be approved.
Let us understand the basic criteria of company registration for Nidhi:
- Minimum capital of Rs.5 lakh,
- Min People Required 7 Promoters
- Registration time `15 days to 30 days
Nidhi company registration Procedure is similar to a Public Limited company. Nidhi company is a totally separate finance model and doesn't require any kind of separate license.
Here are the benefits and drawbacks of Nidhi Company:
The advantages of Nidhi Company
- Not required huge investment and you can collect easy funds from Members (Members are like your client)
- Under MCA act, so easy to do all compliances.
- Its looks like mini bank - your products are Saving Account, Fixed Deposits, Recurring Deposits, Loans & Locker.
Nidhi Company Drawbacks
- Can run up to district level after three years you can go on the state level.
- Govt fix all the rates. You need better IT Support because most of IT Softwares in the market is not run by any Reputated firms(We recommend IT Software with Bank API, which makes your Nidhi Company more trustworthy.)
- you need to increase capital if you want to accept more funding.
- Can offer finance only to members
Micro Finance Company (section 8 & NBFC Model)
While this route is already very popular, for an unexplained reason, companies are not getting approval for this type. Micro finance companies may also be licensed, technically and lawfully, without RBI approval. The MCA, however, would not approve the company for unexplained reasons.
Therefore, if you want to start a business in India, choose Nidhi rather than Micro Finance Firm.
you can go with 5 cr of capital NBFC Model and apply for a direct license from RBI .For this reason, RBI approves the application for registration of microfinance companies and the applicant must submit a number of documents. NBFC based model is quite popular because of its versatility and flexibility in terms of exposure and compliance.
Microfinance Business Advantages
- Loans that are collateral-free
- Under urgency, disburse fast credit
- Helping individuals to fulfil their financial needs
- Provide an expansive loan portfolio
- Promote entrepreneurship and self-sufficiency
Microfinance Sector Drawbacks
- Harsh conditions for repayment
- Large Sum of Loan
- High-interest rate
A producer company can be identified as a legally recognised body of farmers with the intention of improving the quality of living of farmers and farmers and ensuring a good standard of support, income, and profitability at their disposal.
Producer companies are companies that are ideal for manufacturers or growers. It needs at least 10 individuals, to begin with. Like the Nidhi Company, this choice is close, but the Nidhi Company provides more versatility.
This is not especially a finance Company, but a useful concept for farmers ..
Local license - Money Lender License
A money lender is someone who, at a higher rate of interest, loans small sums of money. The explanation for charging higher interest rates is that, for different reasons, the moneylender faces a higher risk of default than regular banks. People who are desperately in need of money but do not have a bank account at the same time, individuals with poor credit records, and others who can't get money from friends or family contact a credit facility money lender. This license is normally valid for a year. Moneylenders are regulated in India by the Moneylenders Act in different states. Normally this license apply offline, better to visit tahsildar directly in your area.
Some of the states provide the license for local finance to start the state or rather district finance company. The state financial license is usually offered by the states of Kerala and Maharashtra.
For Beginner or Minimum investment model
We already explained to you the types of options for finance companies in India and also explained to you why Nidhi Companies are currently the most popular choice.
For Experienced with Min. 2 Crore Investment
It's better to start a Loan Company (NBFC) with the fintech model.
If you are looking to start a finance company in India., we can help you out and take care of all the documentation and processes. Do get in touch with us so that we can help you grow!
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