What is a Microfinance Company?
A microfinance company is a financial institution that provides small loans (microcredit) and other financial services to low-income individuals and underserved communities who lack access to traditional banking. These institutions play a critical role in financial inclusion, helping people start small businesses, manage emergencies, and improve their livelihoods.
In India, microfinance business can be conducted primarily through two legal structures: as a Non-Banking Financial Company - Microfinance Institution (NBFC-MFI) or as a Section 8 Company (Non-profit).
Legal Structures: NBFC-MFI vs. Section 8 Company
Choosing the right structure is crucial for your business goals and resources.
| Feature | NBFC-MFI | Section 8 Company |
|---|---|---|
| Primary Goal | Commercial (For-Profit) | Social Impact (Non-Profit) |
| Regulator | RBI | MCA (RBI guidelines apply) |
| Min. Net Owned Fund | ₹5 Crore (₹2 Crore for NE India) | No minimum requirement |
| RBI Approval | Mandatory (CoR required) | Not required (for small scale) |
| Profit Distribution | Allowed (Dividends) | Prohibited (Must reinvest) |
Prerequisites for Registration
For NBFC-MFI
- Company Registration: Must be registered as a Public or Private Limited Company.
- Net Owned Fund (NOF): Minimum ₹5 Crore (₹2 Crore for North Eastern states).
- Director Experience: Directors must have relevant experience in the banking or financial sector.
- CIBIL Score: Directors must have a clean financial track record.
For Section 8 Company
- Company Registration: Must be registered under Section 8 of the Companies Act, 2013.
- Social Objective: The MOA must clearly state the objective of providing credit to the poor for their upliftment.
- Directors: Minimum 2 directors (for Pvt Ltd equivalent) or 3 (for Public Ltd equivalent). No specific financial experience mandated, but helpful.
Registration Process
Step 1: Company Incorporation
Register your company with the Ministry of Corporate Affairs (MCA). For Section 8, this involves obtaining a license from the Central Government. For NBFC-MFI, register as a normal Private or Public Limited Company.
Step 2: Capital Arrangement (For NBFC-MFI)
Deposit the required Net Owned Fund (₹5 Cr or ₹2 Cr) in a bank as a Fixed Deposit. Obtain a "No Lien" certificate from the bank stating the funds are free from any encumbrance.
Step 3: Apply for RBI License (For NBFC-MFI)
Submit an online application via the RBI's COSMOS portal (Form COR). Upload all required documents, including the business plan and financial projections.
Step 4: Hard Copy Submission
Submit the physical copy of the application along with all supporting documents to the Regional Office of the RBI.
Step 5: Review and Approval
The RBI reviews the application. They may ask for clarifications or additional documents. Upon satisfaction, the Certificate of Registration (CoR) is issued.
Note: Section 8 companies can start operations immediately after incorporation, provided they comply with RBI's operational guidelines for microfinance activities.
Documents Required
- Entity Documents: Certificate of Incorporation, MOA & AOA.
- Director Documents: PAN, Aadhaar, Passport (for foreign directors), Photos, CIBIL Reports.
- Office Proof: Rent Agreement/Sale Deed, Utility Bill (Electricity/Water), NOC from owner.
- Financials: Audited financial statements (for existing companies), Banker's Report, No Lien Certificate (for NBFC).
- Business Plan: Detailed project report covering loan products, risk management, and financial projections.
- Board Resolutions: For applying to RBI and adopting fair practices code.
Fees & Costs
Section 8 Company: The cost is relatively low, primarily involving government registration fees (approx. ₹10,000 - ₹20,000) plus professional fees.
NBFC-MFI: The cost is significantly higher.
- Government Fee: RBI Application fee is approx. ₹3.5 Lakhs.
- Capital: Minimum ₹5 Crore (or ₹2 Crore) locked capital.
- Professional Fees: For legal and financial consultancy.
RBI Guidelines for Microfinance
Even Section 8 companies must adhere to certain operational guidelines:
- Loan Limits: Household annual income limit for borrowers is ₹3 Lakhs.
- Collateral-Free: All microfinance loans must be collateral-free.
- Repayment: Flexible repayment options (weekly, fortnightly, monthly). No prepayment penalty.
- Interest Rates: Must be reasonable and transparent. For NBFC-MFIs, it's linked to the cost of funds.
- Fair Practices: Must have a board-approved Fair Practices Code and grievance redressal mechanism.
