Introduction of Micro-Finance Company
Micro finance Company refers to an array of financial services to low income group by providing loans, savings and insurance. Such funds are made available to poor entrepreneurs and small business owners who do not have any collateral and have no access to banking facilities. The people in rural areas need credit which is cheap and does not increase the burden in their input cost which is important so that these sectors grow and develop and raise the Indian economy.
Micro-finance companies can provide loans up to INR 50,000 in the rural area to various households, small businessmen and up to INR 1,25,000 to small entrepreneurs, enterprises and people in the urban areas for residential dwelling. Micro-finance Institutions generally provide loans without any collateral security to the small businessman, farmers, agriculturists, etc.. Such institutions are helping in rural and agricultural development and employment generation and boosting up the Indian Economy.
Microfinance can be registered in 2 ways; one as a non-profit organization which is registered as Section-8 Company which doesn’t require any RBI approval and the other as Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI) which can be formed by taking approval from the RBI.
Legal Window has team of experts providing you the best assistance, timely delivery and guaranteeing the highest customer satisfaction with respect to Company formation process. You may get in touch with our team on 072407-51000 or email firstname.lastname@example.org for Micro finance company registration and Compliance services.
Advantages of Micro Finance Company
Types of Micro-Finance Company
Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI) NBFC-MFI is a non-deposit taking NBFC which can be setup with minimum net owned funds of Rs. 5 crore and having not less than 85% of its assets in the nature of qualifying assets. The conditions and limitations of the loans are as follows:
- Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,25,000 or urban and semi-urban household income not exceeding ₹ 2,00,000;
- Loan amount should not exceed ₹ 75,000 in the first cycle and ₹ 1,25,000 in subsequent cycles;
- Total indebtedness of the borrower should not exceed ₹ 1,25,000;
- Tenure of the loan should not be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;
- Loan can be extended without collateral;
- Aggregate amount of loans, given for income generation, should not be less than 50 per cent of the total loans given by the MFIs;
- Loan can be repaid on weekly, fortnightly or monthly installments at the choice of the borrower
Section 8 Company is incorporated with an object to promote commerce, art, science, sports, research, education, religion, protection of environment, charity or any other object, who intends to apply their income and profits in promoting their objects and prohibits the payment of dividend to its members. Section-8 Company can be incorporated as a Private or Public Company.
- Approval of RBI is not required.
- There is no requirement of minimum capital of Rs. 5 Crores.
- Minimum Compliances as compared to NBFCs.
- Such companies can give unsecured loans to small businesses of Rs.50,000.
- Such companies can give loans for dwelling residence up to Rs.1.25 lakh.
- Section-8 companies are required to follow the RBI guidelines on interest rate and processing charges.
- It is a legal finance business as laid in the master circular of RBI and you can sue the defaulter in case of non-payment of loan amount.
Minimum two Directors and maximum fifteen
Minimum two Members
Digital Signatures of Subscriber and Directors
No Minimum Capital requirement
Director Identification Number if available
Non-profit objective i.e. charitable object
Documents Required for Incorporation
Note:- In case of NRI or Foreign National documents of Directors and Subscribers must be notarized or apostilled.
Process of Incorporation of Micro-Finance Company
1. Complete the Application Form
You are requested to first fill the simple questionnaire provided by our expert team.
2. Document Processing
At the second step we will be requiring the documents in accordance with the questionnaire filled by you so that we can arrange them as per the requirement and for processing.
3. Application for DSC
First of all DSC (Digital Signature Certificate consisting of the E-signatures) is required to be prepared. This step can be ignored if prepared already. It will approximately take 1-2 days
4. Name Availability
The next step is to check the name availability. The name should be unique in nature and should not be similar to name of any other entity registered. It may take at least 1-2 days.
5. E-filing for incorporation of a Company
Once the name is approved, an online application is required to filed through SPICE+ along with the requisite documents as obtained from the client with ROC. The MOA as well as AOA shall be filed online. This process again takes approximately 2-3 days.
6. Get Certificate of Incorporation
Lastly, after the approval a Certificate of Incorporation and Section-8 License will be provided through e-mail which signifies that the Company has been incorporated
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More Insights on Registration of Micro Finance Company
How to Select the Name of Company
- You can check Company name availability thereby logging into MCA where you need to keep in mind two or three available options along with the activity type. The name of Section-8 Company should have words like Association, Society, Council, Club, Charities, Foundation, Academy, Institute, Organization, and Federation. Our team will assist you in the selection of name of company.
- Also, along with checking the name availability we also need to check the trademark if already registered under the proposed name which makes the online application for registration more powerful. If you want to have a trademark of your word or logo you can get the same through Legal Window by clicking on the below mentioned link Trademark Registration
Other Key Points
- If the proposed Director is already having the DIN then you can also check whether DIR-3 KYC is completed. You can verify the same with the help of our experts. If the same is not done yet it can be done with help of Legal Window.
- The microfinance company is required to manage all the compliances after incorporation of the company like appointment of statutory auditor, filing commencement of business, Income Tax Filing, Annual Returns with ROC and other compliances as required by the law. Legal Window has a team of experts who keeps an eye on the due dates of your compliances and reminds you through mails.
- Acceptance of Deposits by Micro Finance Company: Companies Act, 2013 does not permit the section 8 companies to accept deposits. The company can invest its funds or raise capital or through donation start Microfinance Company. The company cannot take deposits from the market in order to lend the same in the market. It has to use its own funds.
Interest rates on Loans by Micro Finance Companies
There are three types of charges that are levied by the Micro Finance Company (MFI) while giving loans
The average interest rate cannot not exceed 26%.
Should not be more than 1% of the gross loan amount.
Actual cost of insurance for group, life, health etc can be charged.
Calculation of Interest Rate for Micro Finance
The rates of interest charged by Micro Finance Companies must be less of the following:
- Cost of funds plus 12% margin or
- Average base rate multiplied by 2.75.
The average base rate is 8.67% to be charged from the borrowers from 1st April, 2020.
FAQs on Micro-Finance Comapny
Micro finance Company refers to an array of financial services to low income group by providing loans, savings and insurance.
The advantages of incorporating a Microfinance Company are as follows:
- Generation of Employment
- Collateral free Borrowings
- Strengthening of Financial Condition
- Encourages entrepreneurship
The amortization of the processing fees is not permitted; it should be booked in the accounting period in which these are paid/ received.
The time duration depends upon the type of microfinance chosen by you. In case of Section-8 company, it generally takes 10-15 days and in case of NBFC-MFI it may take time of around 2-3 months for getting the approval from RBI.
Section-8 Company cannot be closed under fast track exit mode. The company closure is a lengthy process and proper procedure of winding up has to be followed in order to close section-8 Company.
In India, finance businesses are approved and directed by RBI. However, RBI has ranted exemption to some business to do banking activities up to a specified limit. The RBI by its master circular: RBI/2015-16/15 DNBR (PD) CC.No.052/03.10.119/2015-16 Dated July 01, 2015, has exempted all Section 8 Companies involved in microfinance activities to take a license.
The people in rural areas need credit which is cheap and does not increase the burden in their input cost which is important so that these sectors grow and develop and raise the Indian economy.
Yes, the loan can be provided to the borrowers for their personal purpose by Microfinance companies as per the limits prescribed by RBI(50%).
Yes, Microfinance Company can charge a different rate of interest to its different customers but the difference for individual loans between the minimum and maximum interest rate cannot exceed 4 per cent.
No. this is the main benefit of taking loans from micro finance company that they do not take any collateral security or marginal money in respect of the loans granted.
The auditor has to be appointed within 30 days of incorporation of company by passing a board resolution.