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Overview

Microfinance Company in India

A Microfinance Company in India (MFI) is a type of financial institution that provides small loans, savings options, and other financial services to low-income individuals and groups who lack access to traditional banking facilities. These institutions are instrumental in promoting financial inclusion in underserved communities by supporting income-generating activities for self-employment, rural development, and poverty alleviation. Microfinance companies are regulated by the Reserve Bank of India (RBI) and operate under stringent compliance norms to protect customers and ensure financial stability

There are two primary ways to set up a Microfinance Institution in India:

  1. NBFC-MFI (Non-Banking Financial Company - Microfinance Institution): Requires RBI registration and capital investment
  2. Section 8 Company (Not-for-Profit Microfinance): Registered under the Companies Act, 2013, and does not require RBI approval, but its lending scope is limited.

Why Registration is Important

  1. Financial Inclusion: Empowers low-income communities by providing access to essential financial services
  2. Regulatory Compliance: Ensures the company operates legally and adheres to RBI or MCA (Ministry of Corporate Affairs) regulations, building credibility.
  3. Legal Recognition: Establishes the institution as a legitimate financial entity, enhancing customer trust.
  4. Government and Institutional Support: Eligibility for financial support from government programs and partnerships with development banks.
  5. Limited Liability: Protects personal assets of promoters by limiting liability to the company’s investments

Documents Required

For NBFC-MFI Registration:

For Directors and Shareholders

Company Documents

For Section 8 Microfinance Company

For Directors

Company Documents



Procedures

For NBFC-MFI Registration

  • Incorporate as an NBFC
    Register as a Public Limited or Private Limited Company with a minimum paid-up capital of ₹5 crore (₹2 crore for companies in Northeastern states).
  • Fixed Deposit for Capital Compliance
    Deposit the minimum capital requirement in a Fixed Deposit (FD) account with a scheduled bank.
  • Draft a Business Plan
    Prepare a five-year business plan detailing financial projections, target market, and social impact.
  • Apply on RBI’s COSMOS Portal
    Submit the online NBFC application on the RBI COSMOS portal, providing all required documents.
  • Submit Physical Documents
    Send a hard copy of the application and supporting documents to the RBI office.
  • RBI Review and Inspection
    RBI reviews the application and may conduct an inspection or seek further clarifications.
  • Grant of Certificate of Registration (CoR)
    Upon satisfactory review, RBI issues a Certificate of Registration, authorizing microfinance activities.


Features

Features & Benefits of Microfinance Company Registration in India

Regulated by RBI
NBFC-MFIs are regulated by the Reserve Bank of India, ensuring financial stability and consumer protection.
Prev Next
Minimum Capital Requirement
₹5 crore for national-level operations and ₹2 crore for regional-level operations, with ₹1 crore for northeastern states.
Prev Next
Interest Rate Caps
MFIs must adhere to RBI-prescribed interest rates and loan sizes.
Prev Next
Focus on Financial Inclusion
MFIs aim to provide credit to low-income and underserved populations.
Prev Next
Profit Distribution
NBFC-MFIs can distribute profits, while Section 8 MFIs must reinvest profits into the business.
Prev Next

Microfinance Company Registration in India

Access to Funding
Registered MFIs can access various funding sources, including banks, investors, and government schemes.
Prev Next
Enhanced Credibility
Registration increases credibility with clients and partners, fostering trust and attracting more borrowers.
Prev Next
Regulatory Compliance
Compliance with RBI regulations ensures operational legitimacy and can lead to better business practices.
Prev Next
Capacity Building
Registered MFIs often gain access to training and capacity-building programs to improve operational efficiency and service delivery.
Prev Next
Market Expansion Opportunities
Registration allows MFIs to expand their operations and services, tapping into new markets and customer segments.
Prev Next


Comparison between NBFC-MFI, NBFC And Section 8 Company

Feature NBFC-MFI NBFC Section 8 Company
Regulatory Authority Reserve Bank of India (RBI) Reserve Bank of India (RBI) Ministry of Corporate Affairs (MCA)
Capital Requirement ₹5 crore (national), ₹2 crore (regional) ₹2 crore (minimum NOF) No minimum capital requirement
Profit Motive For-profit For-profit Non-profit
Interest Rate Cap Yes No Not applicable
Loan Size Limit Yes No Not applicable
Compliance Requirements High High Moderate
Focus Area Financial inclusion, small loans Broad financial services Charitable, including microfinance
Distribution of Profits Allowed Allowed Not allowed


Frequently Asked Questions

What is the minimum capital requirement to start an NBFC-MFI in India?

The minimum Net Owned Fund (NOF) required is ₹5 crore for national-level MFIs and ₹2 crore for regional-level MFIs. In the northeastern states, the requirement is ₹1 crore.

Can an NBFC-MFI accept deposits?

No, NBFC-MFIs cannot accept demand deposits. They primarily offer microloans.

What is the role of the RBI in regulating MFIs?

The RBI regulates MFIs to ensure they operate within a framework that protects borrowers, maintains financial stability, and promotes financial inclusion.

How long does it take to register an NBFC-MFI with the RBI?

The registration process can take several months, depending on the completeness of the application and the RBI’s scrutiny process.

Can a Section 8 company engage in microfinance activities?

NBFCs must comply with various RBI regulations, including maintaining capital adequacy, submitting periodic financial reports, and adhering to asset classification and provisioning norms.

Can a Section 8 company engage in microfinance activities?

Yes, a Section 8 company can provide microloans, but it cannot distribute profits among its members. All profits must be reinvested in the company’s objectives.

Overview

Microfinance Company Registration in India

A Microfinance Company in India ) is a type of financial institution that provides small loans, savings options, and other financial services to low-income individuals and groups who lack access to traditional banking facilities. These institutions are instrumental in promoting financial inclusion in underserved communities by supporting income-generating activities for self-employment, rural development, and poverty alleviation. Microfinance companies are regulated by the Reserve Bank of India (RBI) and operate under stringent compliance norms to protect customers and ensure financial stability.

There are two primary ways to set up a Microfinance Institution in India

  1. NBFC-MFI (Non-Banking Financial Company - Microfinance Institution): Requires RBI registration and capital investment.
  2. Section 8 Company (Not-for-Profit Microfinance) : Registered under the Companies Act, 2013, and does not require RBI approval, but its lending scope is limited.
Why Registration is Important
  1. Financial Inclusion : Empowers low-income communities by providing access to essential financial services.
  2. Regulatory Compliance: Ensures the company operates legally and adheres to RBI or MCA (Ministry of Corporate Affairs) regulations, building credibility.
  3. Legal Recognition : Establishes the institution as a legitimate financial entity, enhancing customer trust.
  4. Government and Institutional Support : : Eligibility for financial support from government programs and partnerships with development banks.
  5. Limited Liability: Protects personal assets of promoters by limiting liability to the company’s investments

Documents Required

For NBFC-MFI Registration

For Directors and Shareholders

For Section 8 Microfinance Company

Procedures

  • Incorporate as an NBFC
    Register as a Public Limited or Private Limited Company with a minimum paid-up capital of ₹5 crore (₹2 crore for companies in Northeastern states).
  • FD for Capital Compliance
    Deposit the minimum capital requirement in a Fixed Deposit (FD) account with a scheduled bank.
  • Draft a Business Plan
    Prepare a five-year business plan detailing financial projections, target market, and social impact.
  • Apply on RBI’s COSMOS Portal
    Submit the online NBFC application on the RBI COSMOS portal, providing all required documents.
  • Submit Documents to RBI
    Send a hard copy of the application and supporting documents to the RBI office.
  • RBI Review and Inspection
    RBI reviews the application and may conduct an inspection or seek further clarifications.
  • Grant of Certificate (CoR)
    Upon satisfactory review, RBI issues a Certificate of Registration, authorizing microfinance activities.

Features

Features & Benefits of Microfinance Company Registration in India

Regulated by RBI

NBFC-MFIs are regulated by the Reserve Bank of India, ensuring financial stability and consumer protection.Minimum Capital Requirement: ₹5 crore for

Minimum Capital Requirement

₹5 crore for national-level operations and ₹2 crore for regional-level operations, with ₹1 crore for northeastern states.

Interest Rate Caps

MFIs must adhere to RBI-prescribed interest rates and loan sizes.

Focus on Financial Inclusion

MFIs aim to provide credit to low-income and underserved populations.

Profit Distribution

NBFC-MFIs can distribute profits, while Section 8 MFIs must reinvest profits into the business.

Access to Funding

Registered MFIs can access various funding sources, including banks, investors, and government schemes.

Enhanced Credibility

Registration increases credibility with clients and partners, fostering trust and attracting more borrowers.

Regulatory Compliance

Compliance with RBI regulations ensures operational legitimacy and can lead to better business practices.

Capacity Building

Registered MFIs often gain access to training and capacity-building programs to improve operational efficiency and service delivery.

Market Expansion Opportunities

Registration allows MFIs to expand their operations and services, tapping into new markets and customer segments.

Comparison between NBFC-MFI, NBFC And Section 8 Company

Feature NBFC-MFI NBFC Section 8 Company
Regulatory Authority Reserve Bank of India (RBI) Reserve Bank of India (RBI) Ministry of Corporate Affairs (MCA)
Capital Requirement ₹5 crore (national), ₹2 crore (regional) ₹2 crore (minimum NOF) No minimum capital requirement
Profit Motive For-profit For-profit Non-profit
Interest Rate Cap Yes No Not applicable
Loan Size Limit Yes No Not applicable
Compliance Requirements High High Moderate
Focus Area Financial inclusion, small loans Broad financial services Charitable, including microfinance
Distribution of Profits Allowed Allowed Not allowed

Frequently Asked Questions

What is the minimum capital requirement to start an NBFC-MFI in India?

The minimum Net Owned Fund (NOF) required is ₹5 crore for national-level MFIs and ₹2 crore for regional-level MFIs. In the northeastern states, the requirement is ₹1 crore.

Can an NBFC-MFI accept deposits?

No, NBFC-MFIs cannot accept demand deposits. They primarily offer microloans.

What is the role of the RBI in regulating MFIs?

The RBI regulates MFIs to ensure they operate within a framework that protects borrowers, maintains financial stability, and promotes financial inclusion.

How long does it take to register an NBFC-MFI with the RBI?

The registration process can take several months, depending on the completeness of the application and the RBI’s scrutiny process.

Can a Section 8 company engage in microfinance activities?

NBFCs must comply with various RBI regulations, including maintaining capital adequacy, submitting periodic financial reports, and adhering to asset classification and provisioning norms.

Can a Section 8 company engage in microfinance activities?

Yes, a Section 8 company can provide microloans, but it cannot distribute profits among its members. All profits must be reinvested in the company’s objectives.