What is Microfinance Company Registration?
Microfinance Company Registration is done under Section 8. Reserve Bank of India has drafted a policy framework in order to provide required legitimacy to the microfinance sector.
A banking service designed with the aim to provide financial support to the unemployed or low-income individual is called microfinance. Microcredit is another term for microfinance. Often these low-income individuals have no access to other financial services. Though, institutions who become part of microfinance often offer lending. There are banks which are comfortable in offering additional services such as checking and savings accounts along with providing microinsurance products. Microfinance came into existence with the aim to provide an opportunity to impoverished people.
As per the estimation of World Bank, more than 500 million people have benefitted from microfinance related options.
Microfinance focuses on improving the lives of low-income people or unemployed individuals. It provides financial resources to the people who are trapped in poverty and have limited finances or to those who do not have enough income to do business with traditional financial institutions. There are poor people who rely on friends, family, and even on loan sharks for help, microfinance supports such people so that they can have access to capital.
Microfinance also gives loans, credit access to savings accounts-even insurance policies and money transfer facility to the small scale business and entrepreneur. Mainly such enterprises exist in the economy of developing countries.
What are Microfinance Institutions (MFIs) as NBFC?
Microfinance Institutions (MFIs) are a kind of non-deposit taking NBFC (other than a company licensed under section 8 of the Companies Act, 2013). MFIs perform banking at a small level as a bank does. MFI Exist at a very small level than NBFC. The role of Microfinance Institutions is to provides similar lending services as NBFC to the poor and weaker sections of the society who do not have access to regular banking facilities.
Benefits of MicroFinance
World Bank has estimated that approximately 500 million people have availed the services of microfinance. As per the International Finance Corporation (IFC), part of the larger World Bank Group, in 2014, more than 130 million people have directly received benefit from microfinance-related operations.
Allows People to Provide For Their Families
Microfinance gives support to people who are dealing with extreme poverty. Health care has been the major cause of concern for poverty-driven people, and it's often health-related issues that cause a return to poverty. It gives poor people an opportunity to come out of the difficult economic situation.
Gives People Access to Credit
Banks do not sanction loans to someone without credit or collateral because of the amount of risk involved. Those who are stuck in poverty do not have any credit or collateral.
Microfinance has extended its helping hand by providing access to small amounts of credit which can prove constructive in removing poverty at a rapid pace.
Creates the Possibility of Future Investments
Poverty is a kind of cycle that perpetuates itself. But the concept of microfinance has changed this by making money available. Once the poor mass can afford basic needs for their families they can focus on improving their sanitation and can invest in better wells. They can stay more productive with their money and can use it for their kids.
Creates Real Job
Microfinance supports the economy of the country by creating job opportunities for the people. It gives people an opportunity to work and earn income which in turn proves beneficial to the economy, especially to local economy since there are more revenues available to move through local businesses and service providers.
Offers Significant Economic Gains
Active participation in microfinancing program improves nutrition, sanitation and provides job opportunities to the people dealing in poverty. It also empowers women to stand strongly and firmly for their families. In fact, women are the major microfinance borrowers.
Encourages People To Save
Microfinance provides the opportunity of saving to the people who were once incompetent to meet their daily needs. Now, when their basic needs are met, it becomes their natural inclination to save the leftover for the future emergency.
Does It Actually Work?
Microfinance has gained appreciation because it creates a way to end the poverty cycle, decrease unemployment, and improve the earning power of people. But there are experts who say that it may not work effectively in future and may get lost in its mission. Other experts are of the opinion that microfinance can serve as a valuable tool for the underprivileged when used effectively and properly. And industry's high repayment rate works as a proof of its effectiveness.
Either way, microfinance is a crucial topic in the financial realm, and if used correctly, it can work miraculously to boost the economy.
How Microfinance Works?
Companies indulge in microfinancing deliver a large number of services that range from providing the basics-like bank checking and savings accounts-to start-up capital for small business entrepreneurs and educational programs that teach the principles of investing. With the help of these programs, it is easy to keep focus on skills like bookkeeping, cash-flow management, and technical or professional skills like accounting. Many microfinancing organizations work in the direction to promote small scale entrepreneurs; they don't work like typical financing situations, in which the lender is focussed with the borrower having enough collateral to cover the loan.
In many cases, people who seek to take financial support from microfinancing institutions need to attend basic money-management class. The class will enlighten them on the topics related to interest rates, clear their concept on cash flow, how financing agreements and savings account works, and how to manage debts.
Once the basic understanding of money-management is clear, then the customer can apply for loan. The process of sanctioning loan is similar to the traditional banks, a loan officer will help and guide the borrower with applications, oversees the lending process, and validate loan.
There are microfinancing institutions that not only issue loans but also provide other helpful resources to small businesses and entrepreneurs and help them to get their businesses off the ground.
Microfinance umbrella covers all the accounts that are controlled and managed by microfinance; these accounts are called micro-savings accounts. With microfinancing, entrepreneurs enjoy the liberty to have savings account with zero restriction of minimum balance. And microinsurance gives borrowers insurance at a lower rate, and with lesser premium.
Microfinance Loan Terms
Microfinanciers acts like conventional lenders; they charge interest on loans and has specific repayment plans with payments due at regular intervals. Some lenders need loan recipients so that they can keep a part of their income separate in a savings account which can further be used as insurance if the customer defaults. When the borrowers clear off the loan successfully, then they have just accrued extra savings.
Since there are many applicants who cannot offer collateral in such a scenario microlenders pool borrowers together as a buffer. On the issuance of loan, recipients agree to repay their debts together. As we know, success of any program depends on the contribution of everyone; this sort of environment generates peer pressure that can help to ensure repayment. Repayment of loan helps the recipient in generating good credit history, which gives them the freedom to obtain larger loans in the future.
Often borrowers of microfinance institutions are classified as poor, but the repayment amount they are liable to pay on microloans is usually higher than the average repayment rate on more conventional forms of financing.
Why is Microfinancing Important?
Microfinance paves the way for small scale businesses by providing them resources and access to capital. It makes them financially capable of improving their lives. It grants loans to the financially undeserving such as those who cannot get checking accounts, lines of credit, or loans from traditional banks.
Without the existence of microfinance, these groups may become vulnerable and have to resort to using loans or payday advances with high rate of interest or may even borrow money from friends and family. Microfinance gives them an opportunity which they can utilize by investing in their business and as a result invest in themselves.
Procedure for Microfinance Company Registration
- Company Registration
The first process in MFI (Microfinance Institution) registration is to register a company either as Private Limited Company or Public Limited Company as per Companies Act, 2013. Initially, the company can be registered with the minimum capital of Rs.1,00,000.
- Raise Capital
The next step is to raise authorized and paid up share capital up to Rs. 5 Crore or Rs. 2 Crore as the case may be. It should be raised in the form of equity Share Capital and not Preference Share Capital.
- Bank Account Opening
Once the incorporation of the company is done, the amount received shall be deposited in a bank account in the form of Fixed Deposit. After this you are eligible to obtain the certificate of no lien from the bank. This certificate shall be attached with an application which will be submitted with the RBI.
- Application for Microfinance Company Registration with RBI
The next step is to get all the required copies and submit it with the RBI for carrying business operations. Following are required to be submitted: