PLANNING & SETTING UP OF MICRO-FINANCE BUSINESS

What Is Micro-finance Institutions

The government of India is working to achieve with full earnestness towards a major policy objective shift that lays stress towards financial inclusivity. In fulfilling this dream the Microfinance Institutions have taken centre stage as they extend financial services to people of low-income strata who aim to work their way out of poverty.

Micro finance 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 a growing economy with a large population. Government banks and private sector banks can not open their branches in every village. Though, Indian banks have increased their presence but still they have limited reach in remote areas. Micro Finance Institutions (MFI) mainly work in villages and remote areas to empower farmers and small businesses in the villages.

Features Of Micro- Finance Institution

Introduced with an objective to assist the unbanked and under-banked sections of the Indian population, Microfinance is a unique economic development tool that has helped crores of underprivileged people.

The following are the key features of Micro-Finance Institutions:

  • 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 an appropriate agency and obtained necessary licenses/ permits.

Benefit Of Micro-financial Business

The distinctive features of the lending management solution allows microfinance lenders to access the huge untapped sector of the Indian economy without any need for manual intervention, excessive paper load and massive wait times.

Governments of India and the Reserve Bank of India have created a conducive policy framework for Microfinance Institutions (MFIs) to provide necessary legitimacy and impetus to the sector.

The following are the benefits 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 the situation gets better.
  • Helps in meeting credit needs for such a population range from emergency loans, consumption loans, business loan, working capital loan, housing etc.
Particulars NBFC-MFI Section 8 Companies Cooperatives and Mutually aided cooperative societies Societies and Trusts Nidhi Company
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 North Eastern 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.

 

Categories Of Micro-Finance

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

a)   Micro-loans – Microfinance loans are significantly different from others as these are provided to borrowers without any collateral. The ultimate aim of these microloans is to have its recipients outgrow smaller loans and be ready for traditional bank loans.

b) Micro-savings – Micro-savings accounts are a unique concept as they allow entrepreneurs to operate savings accounts with no minimum balance. The main objective of such accounts is to help users inculcate financial discipline and develop a habit in saving for the future.

c)   Micro-insurance – Micro-insurance are a uniquely designed insurance cover provided to borrowers of microloans and its distinct feature is that these insurance plans have much lower premiums than traditional insurance policies.

Brief about of micro finance business

Micro Finance Institutions (MFIs) in India play a major role in its overall development, as they empower underprivileged people and also extend monetary support to all communities and regions. The MFIs have gained a foothold in rural areas and the underdeveloped areas, where nationalized banks have not yet reached.

Thus, in giving opportunities to millions of people to fulfill their dreams and ambitions, these MFIs not only help in the economic growth of the country but also in fair distribution of wealth in all parts.

These are few most prominent types of Microfinance businesses in India:

Particulars NBFC-MFI Section 8 Companies Cooperatives and Mutually aided cooperative societies Societies and Trusts Nidhi Company
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 North Eastern 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.


1. 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 (other than a company licensed under Section 25 of the Indian Companies Act, 1956) 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.

All companies, thus, seeking microfinance company registration as NBFC-MFIs must not have less than 85% of its net assets as “qualifying assets”.

NBFC – MFIs must fulfill the following criteria for NBFC Microfinance company registration:

  • 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.

NBFC Microfinance Company Registration Procedure In India 

NBFC Microfinance company registration procedure in India to be followed is according to the guidelines specified by the RBI.

Step 1: Register a Company

Step 2: Raise authorized and paid up capital to Rs.2 crore

Step 3: Deposit Rs.2 crore in fixed deposits and obtain a certificate

Step 4: Get all the certified copies and complete the other RBI formalities

Step 5: Fill online application for microfinance company registration

Step 6: Submit the hard copy of the application for microfinance company registration to the Regional Office of the RBI

After the completion of NBFC Microfinance company registration procedure in India, the Head Office of RBI shall issue the NBFC license. An applicant can check the status of the application online by the help of acknowledgement number.

2. 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

  • commerce
  • art
  • science
  • sports
  • education
  • research
  • social welfare
  • religion
  • charity
  • 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.

Registration Through Section 8

Compared to NBFC-MFI, the requirements for registration of a section 8 Company and apply for central government licenses is quite simple.

Requirements for Registration Under Section 8

 Maximum INR 50,000 can be given for the business purpose and INR 125,000 for the residential dwelling.

  • No minimum net owned fund requirement.
  • No RBI approval is required since RBI has exempted such companies from registration.

3. Nidhi Company

A Nidhi is a company that seeks microfinance company registration under Section 406 of Companies Act, 2013 and is classified as an NBFC.

“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.

The deposits, thus gathered in a Nidhi company are then used for its members or shareholders and the company provides loans or advances, acquires government-issued stocks, bonds, debentures, securities, etc.

A microfinance company registration done as a Nidhi company is regulated by the Ministry of Corporate Affairs and all its financial dealings are monitored by the RBI.

4. Co-operative Society :

A microfinance company registration of a Cooperative Society is done as that of 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. Thus, cooperatives cannot accept deposits from the general public but are only permitted to do so through their members.

When cooperatives and microfinance go hand in hand and are managed well, as registered under microfinance company registration, then they render help and power to the neediest and help improve their lives.

Cooperatives seeking microfinance company registration are to be done under the conventional state-level cooperative acts, the national level Multi-State Cooperative Societies Act (MSCA 2002), or under the new State-level Mutually Aided Cooperative Societies Act (MACS Act).

FURTHER MICRO FINANCE BUSINESS CAN FURTHER BE CLASSIFIED AS :-

  • Payday loan business online
  • Peer to Peer (P2p) Lending

(a) 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.

Payday loans is a unique and practical concept under which small, unsecured short-term cash loans can be borrowed by people to get through the month until their next salary comes in hand.

Typically, Payday loans target the working classes who have difficulty in making two ends meet at the end of each month and these loans need to be repaid within a short period of time. These loans come at a very high cost due to short tenure, urgent nature and repayment risk associated with it. Payday loans in India are availed by people only in case of an emergency like medical emergency, wedding, payment of school fees, etc.  

(b) 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.

P2P lending works very differently from other financing tools and borrowing from these is not from a financial institution but it is from an individual or group of individuals who are willing to loan money to applicants who are found qualified as per the criteria set by them.

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.

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

Shweta Gupta from MUDS MANAGEMENT is recognized among the most-respected, knowledgeable and yes, pocket-friendly as well. Why not give them a call right now at +91 9911222771 and start a conversation immediately.

By | 2020-07-17T20:04:35+05:30 August 14th, 2017|Micro Financing|5 Comments

5 Comments

  1. Sujoy krishna Das December 19, 2017 at 3:58 pm - Reply

    Very good concept

  2. Ankit Agarwal March 11, 2018 at 11:29 pm - Reply

    Is P2P still covered under MFI ?

  3. Isha Malik March 21, 2018 at 12:35 pm - Reply

    P2P is separate concept and is not covered under MFI.
    For further clarifications, you can contact on +91-9599672352

  4. shailendra singh January 19, 2020 at 8:49 am - Reply

    Very qualitative and genuine information with comparison of different structures for a Micro Finance business.

  5. Ramesh paliya February 18, 2020 at 10:19 pm - Reply

    सर मुझे MFI रजिस्ट्रेशन कराना है कृपया मुझे मेरे सम्पर्क पर सही एडवाइस प्रदान करे ।

    1 रजिस्ट्रेशन स्वयं के नाम से हो सकता है क्या
    2 यदि कारपोरेट बॉडी आवश्यक है तो कितने सदस्य चाहिए
    3 टोटल खर्च कितना हो सकता है
    4 टोटल समय कितना लग सकता है रजिस्ट्रेशन प्राप्त करने के लिए
    5 क्या RBI द्वारा mfi कंपनी को ऐड मिल सकती है क्या
    6 मेरा ngo है जिसमें स्वयं सहायता के महिला समूहों की संख्या 1200 है जिसमें हम उन्हें माइक्रो लोन प्रोवाइड करना चाहते हैं
    कृपया मुझे हिंदी भाषा में हेल्प करें

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