Updated on: Nov 7th, 2023
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7 min read
Microfinance companies, as the name suggests, are financial institutions that provide finances to low-income groups, where the finance requirement is lesser as compared to other sectors of the society. These sectors generally do not have access to traditional financial institutions such as banks and other financial institutions.
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:
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 particular businesses to perform financial activities up to a specified limit.
Therefore, a microfinance company registration can happen in the following two ways:
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 | Not Required |
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 businessLoan 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 |
Given the differences in the two models for forming a microfinance company, the registration process also varies considerably. The following are the steps involved in the registration of a microfinance company through an NBFC:
The other option is to register a company as a Section 8 company. The procedure to be followed for the same is as follows:
As it’s evident, registering a microfinance company as a Section 8 company is relatively easier; however, the lending capacity is also limited. Hence an institution must take into consideration all the facts and make a wise decision.
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Microfinance companies provide financial assistance to low-income groups who lack access to traditional banks. They encourage entrepreneurship, offer support to startups, and formalize lending processes. These companies can be registered as NBFCs or Section 8 companies, each with specific prerequisites and compliance requirements. The registration process involves steps like forming a company, raising capital, and applying for a license.