Small businesses generally struggle to get loans from traditional banks due to a lack of documentation and other requirements. In such cases, microfinance businesses come into existence to help small businesses get access to credits.
Before starting a microfinance company, you will need to be aware of certain crucial steps. Generally, there are two ways to set up a microfinance company. Continue reading this blog to learn the difference between the two and the process involved to set them up.
You can set up a microfinance company under two categories, such as:
- As an NBFC, Non-Banking Finance Company, registered with the RBI.
- As a section 8 company, formed based on the provisions of section 8 of the Companies Act, 2003.
Requirements to register your microfinance company
To register your microfinance company, you will need to meet certain requirements.
- Requirements to register as an NBFC
- You must have RBI approval.
- You must have a minimum net-owned fund of Rs. 5 crores.
- The director or one of the directors must have at least ten years of experience in the service industry.
- The maximum loan limit must not be more than 10% of the total assets.
- You must follow the due process of forming a company.
- It is mandatory to have at least seven members to register a public NBFC and two members for a private NBFC.
Requirements to register as a section 8 company
- RBI approval is not mandatory.
- No minimum requirement of owned funds.
- No prior experience is required for the directors.
- You can offer unsecured loans of up to Rs. 50,000/- to SMEs.
- You must have a minimum of two members in your microfinance company.
The Process involved in registering a microfinance company
The process of registering a company finance company depends on whether you are choosing an NBFC or section 8 company. Here are the steps based on the two categories mentioned above.
Registration as an NBFC
1. Form a company
Before registering as an NBFC, you will need to form a public or private company. You will need at least 7 members to form a public company and at least Rs. 100,000/- and 2 members to form a private company.
2. Raise the minimum net owned fund
You will need to have a minimum capital of Rs. 5 crores as the Net Owned Fund.
3. Deposit the capital as FD
You will need to deposit the required capital as a fixed deposit in a bank. After that, you will get a No lien Certificate.
4. Apply for the license
To get a license from the Reserved Bank of India, you will need to submit the following documents:
- Memorandum of Association
- Articles of Association
- Company incorporation certificate
- Board resolution document
- Auditor’s report on the receipt of fixed deposit
- No lien certificate from the bank
- Structure plan of the microfinance company
- Directors’ credit reports
- Qualification and education proofs of directors
- Income proof and KYC of directors
- Work experience proof of directors in the financial sector
Registration as a section 8 company
1. Get your DSC and DIN
To register your company, you will need to get the Digital Signature Certificate (DSC) and Director Identification Number (DIN) for your directors. They are required for the authorization of the e-forms.
2. Apply for a name approval
After that, you will need to apply for name approval. You will need to fill in Form INC-1. Keep in mind that the proposed name must suggest that your company is a section 8 company. For instance, your company name must contain words like foundation or microcredit.
3. Draft MoA and AoA
In this step, you will need to draft your Articles of Association (AoA) and Memorandum of Association (AoA). You must file them along with specific documents.
4. Apply for incorporation
In the end, you will need to file for microfinance company incorporation under form INC-12. You must submit the following documents with your application:
- PAN Card copies of company directors
- Identity proof
- Address proof
- Ownership proof of the office
- The stamp duty applicable in your state
As mentioned earlier, a microfinance company registration depends on the type of company. It is worth noting that the registration of a company comes with a cost. You will need to pay Rs. 25000/- to register a section 8 company, and the registration cost to register an NBFC comes between Rs. 4 to 5 lakhs.
So, if you wish to set up a microfinance company to offer sme loans to small and medium businesses, you will need to carefully read the above-said steps. It allows you to avoid delays or frustration during the registration of your company.