A microfinance company is also referred to as Microfinance institution. It is a type of non-deposit taking NBFC (Non-banking financial company) which provides small financial support to the people with low income located in rural and semi-urban areas. These people need credit which is cheap and does not increase their input cost and also there is a need for credit in rural areas that should be met for the sectors to grow and develop. This is the reason why Micro-finance companies came into existence. Consequently, the gap between the demand and supply of funds was reducing and the sector started growing up.
The micro-financing institution provides very cheap credit and also very low financing cost. Since the growth of the sector was unstoppable and continuously rising. The sector has nearly uprooted all the small-scale financers. We see that in recent years, the growth in the credit sector was down, but the microfinance institution registered an enormous growth of 39% on a yearly basis.
Micro-finance companies are eligible to provide loans up to INR 50,000 in the rural area and up to INR 1,25,000 to small entrepreneurs, enterprises and people in the urban areas. It lends money or provides loans to the small businessman, farmers, agriculturists, etc. without demanding any collateral security or marginal money. They are a great support to rural and agricultural development and employment generation. These Micro-finance institutions are also exploring other sectors, they have invested in the IPO (Initial public offering) and other services too.
Thus we must note that even though the Micro-finance institutions have grown and had several advantages. Apart from the advantages, there are many disadvantages too. The sector recently has taken the brunt of too many NPAs (Non-performing Assets) falling into its lap. The issue must be addressed because it is also troubling the banking sector too.
There are mainly two ways to register a Micro Finance Company (MFI). One is to form a company and apply for RBI approval. The minimum requirement of the net owned fund of Microfinance company is 5 crore.
The second way is to register an MFI (Micro Finance Company) as a section 8 company and apply for central government licenses. Some features of which are as follows:
There is no minimum requirement for the net owned fund.
No requirement for RBI approval since RBI has exempted this company from registration
Register a Company: The first step is to register an MFI (Micro-finance Company) as a private limited company or public limited company.
Raise paid-up capital of the company: As per the regulation Equity share capital of a company must be raised up to 2 crores or 5 crores.
Opening a bank account: A bank account in the name of micro-finance is opened after the raise in authorized capital in which the amount is deposited.
Application to RBI: The next step is to file an approval application to RBI for microfinance company registration. An individual needs to file an online application along with the required documents.
Submission of Hard copy: After submitting the online application, a Hard copy of the registration application is to be submitted to the regional office of the reserve bank of India.
Issue of certificate: After successful verification of documents and approval of an application, a certificate of commencement of business is issued to the applicant entity.
Copy of PAN card
Passport size photograph of all directors/shareholders
Address proof such as a mobile bill, bank statement, telephone bill
Aadhar card of all directors/shareholders
NOC from the landlord if the office is on rent
Audit report with a financial balance sheet
Copy of MOA, AOA of the company