What is a Micro Finance Company?
Microfinance companies are financial institutions that offer finance to low-income groups who do not have access to traditional financial institutions. These companies provide small loans to small businesses and households that are unable to get loans from banks due to their complex processes. The easiest way to register a Micro Finance Company in India is to register the Section-8 Company with the Ministry of Corporate Affairs (MCA), without charging any marginal money or guarantee security. These companies are a great support to rural and agricultural development, including income and employment creation. There are two types of microfinance companies in India, those that are registered with the RBI and those that are registered as non-profit Section-8 companies and do not require RBI approval.
Need of Micro Finance Companies
In India, there are many institutions like banks that grant loans to finance businesses. So why do we need microfinance companies? The need arises as it serves the following purposes:
- It supports businesses that are unable to provide collateral for loans.
- It promotes and supports women entrepreneurs.
- It offers crucial assistance to startups.
- It provides loans even for small amounts, often in the form of informal loans.
- It formalizes the lending process and encourages responsible borrowing by low-income groups, reducing the risk of over-borrowing and the complications of future debts.
ERA Legal Services Producer Company Package
The Services which are included in our package are as Follows:
✅ Digital Signatures of 7 Subscribers
✅ DIN of Directors
✅Filing of Spice form
✅Issue of Incorporation Certificate along with PAN and TAN
✅Memorandum of Association
✅Articles of Association
✅Provisional PF ESI Registration
✅GST Registration
✅MSME Registration
Formation of Microfinance Companies
Ideally, only a Non-Banking Finance Company (NBFC) is authorized by the Reserve Bank of India to conduct financial business. However, certain exemptions are provided by RBI to businesses to perform financial activities up to a specified limit.
Therefore, a microfinance company registration can happen in the following two ways:
1. Non-Banking Finance Companies (NBFC) duly registered with RBI.
2. Section 8 companies (companies formed under Section 8 of the Companies Act 2013).
Documents Required for Nidhi Company Incorporation
- The PAN card of all directors and subscribers is required.
- Identity proof, such as a voter ID card, driving license, Aadhar card, or passport, of all directors and subscribers is mandatory.
- The address proof, such as bank statement, mobile bill, telephone bill, etc., of all directors and subscribers is necessary.
- Passport size photographs of all directors and subscribers are required.
- A current electric bill or utility bill is mandatory as proof of the registered office.
- In case of applicable, a rent agreement is required.
Producer Company Incorporation Procedure
Step -1 Arrange all Required Documents:
The first step is to arrange all the documents and send the same over the email / WhatsApp to us. Once all the Documents are Received, we will Start the Further Process.
Step -2 DSC and Name Availability:
The Next Step is to Start the Further Process of Digital Signature and Checking the Name availability.
Step-3 Preparation of Documents:
The Next Step is Preparation of Documents to be Submitted at Department.
Step-4 Filing of Spice Form:
The Next Step is Submission of Spice 32 Form at Department.
Advantages of Micro Finance Company
1. No Minimum Capital of Rs 5 Crore
2. No RBI Approval
3. Provides a Way to Funding
4. Offers reasonable services for small businesses
5. Minimum Compliances
Prerequisites for Microfinance Company Registration
To register as a microfinance company either through an NBFC or Section 8 company, some prerequisites must be met. The requirements are as detailed below:
| Prerequisites | NBFC | Section 8 company |
|---|---|---|
| Approval of RBI | Mandatory Requirement | Not Mandatory |
| Net owned funds | Minimum 5 crores | No minimum requirement |
| Director experience | One director must have experience of more than 10 years in financial services | No prior experience required |
| Limit on loans | Maximum of 10% of total assets | Unsecured loan of Rs 50,000 to small business. Loan up to Rs1.25 lakh to dwelling residence |
| Complexity of Microfinance Company Registration | All processes involved in forming a company have to be performed. | Relatively simple as it is registered as a non-profit organization |
| Adhering to Compliances | It has to adhere to all compliances of an NBFC | Adhere to compliance of RBI, but they are less stringent in comparison to NBFC |
| No of members | For a private limited company minimum of 2 For a public limited company minimum of 7 | Minimum of 2 members |
| Status of organization | Profit organization | Non-profitable organization |
FAQ on Micro Finance Company
Q1. What is a Micro Finance Company?
Microfinance company is also named as microcredit. It is a financial service that gives loans, savings, and insurance to entrepreneurs and small business owners who don’t have access to traditional sources of capital, like banks or investors.
Q2. Can Micro Finance Companies Provide loans for personal use?
Yes, the loan can be provided for the personal purpose of the borrowers by Microfinance companies, the still aggregate amount cannot exceed 30% of the total loan.
Q3. Does the prepayment penalty be imposed by micro finance companies?
No, the prepayment penalty cannot be imposed by Microfinance companies.
Q4. What are the limitations of interest rate and loan processing charges of Micro Finance Companies?
Microfinance Companies are not available to charge a higher rate of interest from the directed rate of interest and most variation cannot exceed 4% while if we talk about loan processing costs then it cannot exceed 1% of the gross loan amount. Microfinance Companies can levy loan insurance charges individually.