Microfinance Institutions (MFIs) or companies are non-deposit Non-Banking Financial Companies (NBFCs). They perform banking services but at a small level. Establishments acquire company registration called the Microfinance Company Registration before setting up the company which is a mandatory requirement.
Microfinance Institutions provide financial services, which include loans, savings, and insurance to individuals that belong to the middle and lower community. They also provide finance to the small business owners and entrepreneurs who could not qualify for a bank loan and could fulfill their financial requirements.
Benefits of Microfinance Company
- It helps to provide financial aid to individuals that are planning to start a business.
- The process is simple and quick
- The loan repayment rate is affordable in comparison to traditional banks
- It helps in strengthening the financial needs of individuals by fulfilling their credit needs. Microfinance companies offer different types of loans, such as emergency loans, business loans, working capital loans, housing loans, etc.
Types of Microfinance Company
- Credit unions,
- Commercial banks,
- NGOs (Non-Governmental Organizations),
- Cooperatives, and
- Sectors of government banks
In India, these 'for-profit' MFIs are referred to as Non-Banking Financial Companies (NBFC)
Credit unions are financial institutions that are similar to banks, except for the fact that members own the credit union. They are nonprofit institutions that function with the objective to serve their members and fulfill their financial requirements rather than working to earn a profit. Credit unions offer better savings rates, lower loan rates, and reduced fees.
A commercial bank is a bank that offers services such as accepting deposits, making business loans, etc.
An NGO is a non-profit organization that serves the underprivileged individuals of society. A Non-Government organization is incorporated with the objective of social welfare. It works towards the benefit of those sections of the society that do not receive basic amenities.
A cooperative is an organization or a company that is owned and controlled by a group of individuals called members who have an equal distribution of share in the crucial aspects of the corporation.
Sectors of government banks
Certain public sector banks of India are State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, Central Bank of India, Union Bank of India, Indian Bank, UCO Bank and Bank of Maharashtra, etc.
Microfinance Company Registration Process
The first step in Microfinance company registration is to register a company either as a Private Limited Company or Public Limited Company, as per the Companies Act, 2013. Initially, the company can be registered with the capital of Rs. 125000. After the completion of the company registration, the applicant has to raise a certain amount of capital.
This is the second step in the registration process in which the company owner has to raise authorized and paid-up share capital up to Rs 5 Crores or Rs 2 Crores respectively. An important aspect to keep in mind is that the capital must be raised in the form of Equity Share Capital not Preference Share Capital.
Bank account creation
After incorporation of the company, the amount received must be deposited in a bank account in the form of Fixed Deposit. After the deposit is submitted, a certificate of no lien will be received from the bank. This certificate must be attached to an application that will then be submitted to the Reserve Bank of India (RBI).
Application for Microfinance Company Registration with RBI
The next step in the registration is to obtain all the documents that are verified and submit it to the RBI in order to start the business functions. Certain documents that are mandatory and must be submitted are as follows –
- Certified copy of Certificate of Incorporation
- Certified copy of an extract of the main object clause in MOA.
- Certified copy of the fixed deposit receipt.
- Bankers Certificate of no lien with regards to Net Owned Fund
- Bankers Report
Filing an Online Application
An online application must be filed with the RBI for Microfinance Company Registration. After filing an application, the company receives a Company Application Reference Number.
Submission of Documents in Hard Copy
Once an online application is filed, a hard copy of the application, along with the significant documents, is required to be submitted to the regional office of the Reserve Bank of India. On receiving the application, RBI conducts due diligence, and once the application is approved, the last step is the certificate is issued. RBI issues a certificate of commencement of business and then the individual can commence his business.
Documents Required for Micro Finance Company Registration
- A verified and true copy of Certificate of Incorporation of a company and Certificate of Commencement of Business.
- Verified copy of Memorandum and Articles of Association of the institution
- Board Resolution with regards to the proposed Microfinance company registration.
- Banker's Report that represents the company’s transactions in deposits, loans, fixed deposits, Net Owned Funds (NOF).
- Auditor’s report that states the receipt of the minimum net owned fund (NOF) of the applicant company.
- A certificate of Chartered Accountant that mentions details of subsidiary/holding companies with the details of investments in other NBFCs in the Performa Balance Sheet.
- A certified copy that serves as an educational proof and professional qualifications of all the proposed directors of an applicant company.
Micro Finance Companies provides various benefits to various individuals and business entrepreneurs which is why it is considered by many individuals and business owners. The Government must take necessary steps to boost the microfinance companies and ensure that individuals follow the registration process in a proper manner.
You can also check out : NBFC vs MFI: Non-Banking Financial Company Vs Micro Finance Institutions