PLANNING & SETTING UP OF MICRO-FINANCE BUSINESS
WHAT IS MICRO-FINANCE INSTITUTIONS
Microfinance refers to an array of financial services, including loans, savings and insurance, available to poor entrepreneurs and small business owners who have no collateral and wouldn’t otherwise qualify for a standard bank loan. Most often, microloans are given to those living in still-developing countries who are working in a variety of different trades, including carpentry, fishing and transportation.
India is growing economy with a large population. Government banks and private sector banks can not open their branch in every village. Though, Indian banks have increased their presence but still have limited reach in remote areas. Micro fiancé institutions (MFI) mainly working in villages / remote area to empower farmers and small business in village.
FEATURES OF MICRO- FINANCE INSTITUTION
MFIs functioning under different networks from the organizations concerned. The following are the key features of micro-finance Institution
- Deals with low amounts of financing to people.
- Must have a minimum net worth of as prescribed by the Regulator. .
- Must be incorporated under the new Companies Act 2013, or the earlier Companies Act, 1956.
- Has been registered with appropriate agency and obtained necessary licenses/ permits.
BENEFIT OF MICRO-FINANCIAL BUSINESS
Government of India and the Reserve Bank of India have created conducive policy framework for Microfinance Institutions (MFIs) to provide necessary legitimacy and impetus to the sector. The following are the benefit of Micro Finance Business.
- Provide access to funding
- Encourage self-sufficiency and entrepreneurship
- It offers a better overall loan repayment rate than traditional banking products.
- Strengthen financial condition for some days till situation gets better.
- Help in meeting credit needs for such a population range from emergency loans, consumption loans, business loan, working capital loan, housing etc.
MFIs by Type of Legal Registration
|Particulars||NBFC-MFI||Section 8 Companies||Cooperatives and Mutually aided cooperative societies||Societies and Trusts
|Registration Under||Registered under Companies act 2013 and with Reserve Bank of India||Registered under Companies act 2013||Multi-State Cooperative Societies Act, 2002||Societies Registration Act, 1860 and / or Indian Trust Act 1882
|Registered under Companies act 2013|
|Net Worth||Minimum net owned funds of 5 crore. For
requirement is ` 2 crore
|No minimum requirement||No minimum requirement||No minimum requirement||No Minimum Capital Requirement
|Recommended For||Poor and lower income group||Non-Commercial Banking and NPO||Non-Commercial Banking and NPO||where members have a common interest||Poor and lower income group|
|Rate of interest||1) The average base rate of five largest commercial banks multiplied by 2.75 per annum
2) cost of funds plus margin cap of 10% for MFIs having loan portfolio above ` 100 crore and 12% for those with loan portfolio less than ` 100 crore
The lower of (1) and (2)
|Same as NBFC-MFI||Decided and Approved by the Board of Directors
|Decide and approved by members at general meetings and by the committee||Maximum Rate of Interest on Loan = 7.5% + Maximum rate offered on deposits.
Brief about of micro finance business
- Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)
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:
- 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;
- loan amount does not exceed 50,000 in the first cycle and 1,00,000 in subsequent cycles;
- total indebtedness of the borrower does not exceed 1,00,000;
- tenure of the loan not to be less than 24 months for loan amount in excess of 15,000 with prepayment without penalty;
- loan to be extended without collateral;
- aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower
- Section 8 Company : Section 8 Company is a company registered under the Companies Act, 2013 for charitable or not-for-profit purposes, which pertains to a established ‘for promoting
- social welfare
- protection of environment
- or any such other object’, provided the profits, if any, or other income
is applied for promoting only the objects of the company and no dividend is paid to its members.
- Nidhi Company :“Nidhi” means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit
- Co-operative Society : A cooperative (also known as co-operative, co-op, or coop) is an autonomous association of people united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled business.
FURTHER MICRO FINANCE BUSINESS CAN FURTHER BE CLASSIFIED AS :-
- Payday loan business online
- Peer to Peer (P2p) Lending
Payday loan business online :Payday loans have grown in popularity over the years, mainly as a result of the economic downturn and tightening lending practices by banks and credit unions. Many individuals who previously could get approved for a personal loan or borrow against the equity in their homes have found that they no longer qualify for these types of loans.Payday loans are short-term loans which require no collateral and generally range in amounts from 5000 to 50000. They are meant to be fully repaid within a very short period of time (two weeks). Lenders provide these loans to consumers who are faced with an unexpected financial situation which can’t be put off until the next time they get paid.
Peer to Peer (P2p) Lending :P2P lending is a form of crowd-funding used to raise loans which are paid back with interest. It can be defined as the use of an online platform that matches lenders with borrowers in order to provide unsecured loans. The borrower can either be an individual or a legal person requiring a loan. The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower. The borrowers pay an origination fee (either a flat rate fee or as a percentage of the loan amount raised) according to their risk category. The lenders, depending on the terms of the platform, have to pay an administration fee and an additional fee if they choose to use any additional service (e.g. legal advice etc.), which the platform may provide.
BRIEF PROCEDURE REQUIRED TO BE FOLLOWED FOR SET-UP MICRO FINANCE BUSINESS
Step-1 The Applicant Company must comply with the registration requirement under the new Companies Act 2013/ Reserve Bank of India/ Multi-State Cooperative Societies Act, 2002/ Societies Registration Act, 1860 and / or Indian Trust Act 1882..
Step-2 The applicant company must have sufficient net worth according to the micro finance business requirement.
Step-3 Determine your risk bearing capacity and structure your business.
Step-4 Apply for registration with regulation agency and obtain the necessary permits/license.
Step-5 After satisfaction of all requirements the regulation agency will grant registration certificate and necessary permits/license as the case may be.