Government Registrations

Get various licenses easy and quick

Get Expert Assistance


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.

  • Need for Microfinance Companies
  • Formation of Microfinance Companies
  • Prerequisites for Microfinance Company Registration
  • Microfinance Company Registration as an NBFC
  • Microfinance Company Registration as a Section 8 Company
  • 1. Need for Microfinance 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 provides financial assistance to enterprises that cannot place collateral.

    – It encourages women entrepreneurship.

    – It provides startups with much-needed support.

    – It offers assistance even for nominal amounts which generally are funded as hand loans.

    – It formalizes the process of lending and hence brings about discipline in borrowing by low-income groups. This prevents over-borrowing and reduces complications arising out of high future debts.

    2. 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 particular businesses to perform financial activities up to a specified limit.

    Therefore, a microfinance company registration can happen in the following two ways:

    – Non-Banking Finance Companies (NBFC) duly registered with RBI
    – Section 8 companies (companies formed under Section 8 of the Companies Act 2013)

    3. 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

    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 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

    4. Microfinance Company Registration as an NBFC

    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:

    • Register a company: To be registered as an NBFC microfinance company, the first step is to form a private or a public company. To form a private company, at least 2 members and a capital of Rs 1 lakh is required. To form a public company, at least 7 members are required.
    • Raise capital: The subsequent step is to raise the required minimum net owned funds of Rs 5 crore. For the northeastern region the requirement is of Rs 2 crore.
    • Deposit the capital: On collection of capital, the next step is to deposit the capital in a bank as a fixed deposit and obtain a ‘No lien’ certificate for the same.
    • Apply for license: Finally, the NBFC must fill an online application for the license and submit it along with all the certified documents. A hard copy of the application and license must also be submitted at the regional office of Reserve Bank of India. The documents that must be available with the NBFC at the time of filing are:

      – Memorandum of Association and Articles of Association
      – Incorporation certificate of the company
      – Board resolution copy
      – Copy of Auditor’s report of receipt of fixed deposit receipt
      – Banker’s Certificate of No Lien stating the net owned fund
      – Banker’s report about the company
      – Recent credit report of the directors
      – Net worth certificate of the directors
      – Education/professional qualification proof of the director
      – KYC and income proof of the director
      – Proof of work experience in the financial sector
      – Structure plan of the organization

    5. Microfinance Company Registration as a Section 8 Company

    The other option is to register a company as a Section 8 company. The procedure to be followed for the same is as follows:

    • Apply for Digital Signature Certificate (DSC) and Director Identification Number (DIN): To form a company, the first process is to apply for a DSC and DIN. The DSC is essential for authorizing the e-forms.
    • Apply for name approval: The next step is to apply for name approval in Form INC-1. The name must suggest that it is registered as a Section 8 company. So it must have the words sanstha, foundation or micro credit.
    • File Memorandum of Association (MOA) and Articles of Association (AOA): Post the name approval; the company must draft the MOA and AOA and file it along with necessary documents.
    • File all relevant documents: The last step is to file all relevant documents along with the incorporation certificate, and Form INC -12 to obtain a license. The primary basic documents required for registering a company under both the models are:

      – PAN Card copy of all directors/promoters
      – Documents for identity proof
      – Documents for address proof
      – Photograph of all directors/promoters
      – Proof of ownership of registered office or rental agreement for the same
      – NOC from the owner
      – Applicable stamp duty as mandated by the state
      – Any other documents as required

    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.

    Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

    Get an expert
    at affordable price
    Get an Expert