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All About Microfinance Models In India
Microfinance - also called microcredit- is a way to provide small business owners and entrepreneurs access to capital. Small and individual businesses don’t have access to traditional financial resources from major institutions. It is harder to access loans, insurance, and investments that will grow their businesses. This sector has been instrumental in creating opportunities for low-income households by providing credit access to 64 million unique live borrowers who were previously beyond the reach of traditional financial services. Additionally, the microfinance sector has its own set of challenges, ranging from lack of formal credit history, absence of collateral, laborious customer acquisition process, and low digital and financial literacy. There are various microfinance models in India many of these models are indeed ' formalized ' versions of informal financial systems.
Some of the significant features of microfinance are as follows:
- The borrowers are generally from low-income backgrounds
- Loans availed under microfinance are usually of a small amount, i.e., microloans
- The loan tenure is short
- Microfinance loans do not require any collateral
- These loans are usually repaid at higher frequencies
- The purpose of most microfinance loans is income generation
Government initiatives play a significant role in channeling the credit flow to underserved sectors through priority sector lending, Micro Units Development, and Refinance Agency Ltd. (MUDRA) Yojana, loan co-origination, and private sector investments. In the last couple of years, the microfinance sector has seen promising growth on the back of the rapidly growing Indian economy.
Microfinance in India
Small and medium enterprises (MSMEs) , thereby increasing the contribution of these segments to India’s overall GDP. In FY19, the microfinance sector displayed 40 % growth in terms of the loan portfolio . INR 10 billion funds have been released by the Small Industries Development Bank of India (SIDBI) to boost the microfinance sector. SIDBI has tied up with non-profit organizations and social ventures to channel funds at below-market rates to facilitate affordable borrowing.
In recent years, the microfinance sector has faced new challenges such as:
- Limited access to low-cost funding for Microfinance Institutions (MFIs)
- Low financial and digital literacy among targeted Borrowers
- The demand for more innovative
- Customer-centric products
Reserve Bank of India (RBI) has played a significant role in enabling the microfinance sector to reach out to new geographies. Recently, the Government of India has also increased the microlending limit of borrowers to INR 1.25 lakh to expand the reach of the microfinance sector.
Needs of the microfinance ecosystem
- Availability of alternative capital funding channels
- Customer centricity
- Mature risk and regulatory landscape
- Streamlined operations of customer-facing personnel
- Robust credit risk assessment mechanisms
- Technology enablement for the ‘ high-touch ’ industry
- Women empowerment and the emergence of an entrepreneurship-driven landscape
Different Models of Microfinance in India
The target community forms an 'association' through which various microfinance (and other) activities are initiated. Such activities may include savings. These associations or groups can form of a youth, women. It is also formed around political/religious/cultural issues. It can create support for microenterprises and other work-based issues.
According to NABARD, SHG-BLP is the world’s largest microfinance program in the world.
Bank Guarantees Model
A Bank guarantee is used to obtain a loan from a commercial bank. This guarantee may be arranged externally ( through donor/donation, government agency, etc. ) or internally (using member savings). The loans obtained may be given to an individual or they may be given to the self-formed group. It is a form of capital guarantee scheme. Guaranteed funds may be used for various purposes, including loan recovery and insurance claims . The guaranteed funds can be used for various purposes such as loan recovery or insurance claims.
Bellwether Microfinance Funds (India) is one such example.
Community Banking Model
In India, community banking looks very different. Self Help Groups (SHG) are often instituted in which members of the local community join together and pool capital resources for lending to members. They value transparency in their practices and utilizing their savings for their purposes of lending.
A successful example is the Royal Bank of Scotland (RBS) Foundation India , which has various microfinancing programs to help the poorest communities across India.
A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-owned enterprise. The members are the shareholders and have their share in equity capital. They also share the profit.
Co-operative Development Forum Hyderabad is a successful example of this model. It has built a network of women's thrift groups and men's thrift groups.
Credit Unions Model
This model is based on a member-driven credit union, a self-help financial institution. A union of members is formed. These members form the common community. They agree to save together and give loans to each other at a nominal rate of interest. A credit union's membership is open to all who belong to the group, regardless of race, religion, color, or creed.
The members are people of some common bond:
- Working for the same employer
- Belonging to the same church
- Labor union
- Social fraternity
- Living/working in the same community
Grameen Banking Model
It promotes credit as a human right and is based on the premise that the skills of the poor are underutilized. The Grameen Bank (GB) is based on the voluntary formation of slight groups of five people to provide mutual, morally necessary group guarantees instead of the collateral required by conventional banks.
The whole center is jointly responsible for the repayment. Grameen model is being followed by Sarv Seva Abhiyan (ASSEFA), Activities for Social Alternatives.
This model positions a third party between the lending institutions and the borrowers. The intermediary plays a critical role in generating credit awareness and education among the borrowers. Intermediaries could be individual lenders, NGOs, microenterprise/microcredit programs, and commercial banks (for government-financed programs). The intermediaries are incentivized in monetary and non-monetary forms.
Individual Banking Model
This is a straight forward credit lending model where microloans are given directly to the borrower. The individual banking model is a shift from the group-based model. The MFI gives loans to an individual based on his or her creditworthiness. It also assists in skill development and outreach programs. Co-operative banks, Commercial banks, and Regional Rural Banks mostly adopt this model to give loans to the farming and non-farming unorganized sector.
Self-employment women’s association in India s one such example to have adopted this model. The members own and govern the group.
NGOs are one of the key players in the field of micro-financing. They help the cause of micro-financing by playing the intermediary in multiple dimensions. Non-governmental Organizations (NGOs) played a vital role in rural reconstruction, agricultural development, and rural development even during a pre-independent era in our country. NGOs became a supplementary agency for the developmental activities of the government and in some cases, they become alternatives to the government.
Non-governmental Organizations are committed to the upliftment of poor, marginalized, underprivileged, impoverished, and downtrodden and they are close and accessible to their target groups.
Various NGOs are helping the cause of micro-financing. For example, MYRADA in Karnataka, SHARE in Andhra Pradesh, RDO (Rural Development Organization) in Manipur, RUDSOVAT (Rural Development Society for Vocational Training) in Rajasthan, and ADITHI in Bihar.
ROSCA Model Or Chit Funds
Rotating Savings and Credit Associations or ROSCAs, are essentially a group of individuals who come together and make regular cyclical contributions to a common fund, which is then given as a lump sum to one member in each cycle. At the end of a cycle, the total fund collected goes to any one member. Rotating Savings and Credit Associations are a means to save and borrow simultaneously. There are lakhs of ROSCA functioning in India today.
Village Based Model
It is closely related to the community banking and the Group model, this is the community-based saving and credit model. A group of 25-50 people gets together to enhance their income through self-employment activities. They get their first loan from the implementing agency, which helps them form the community credit enterprise.
Small Business Model
This model places a big responsibility on small and medium enterprises. This has been changing, as more and more importance is placed on small and medium enterprises (SMEs) - for generating employment, for increasing income, and providing services that are lacking.
Future of Microfinance in India
- Affordable borrowing for one and all: Easy access to microcredit
- Reaching the doorstep of every unbanked customer
- The road ahead for a digital microfinance
- Leveraging women empowerment and mobilizing the entrepreneurial landscape
India aims to become a USD 5 trillion economy by 2025 and the microfinance industry will play a leading role in uplifting the lives of millions of low-income households and enabling them to contribute to the country’s economic growth.
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A Complete Guide to Microfinance in India
Listen to A Complete Guide to Microfinance in India
Microfinance is an economic tool that facilitates the achievement of national policies and helps in promoting financial inclusion. Microfinance in India has seen incredible growth in the last two decades in terms of the number of Microfinance customers and institutions offering microfinance. It is delivered to the customers through several financial institutions, such as scheduled commercial banks, regional rural banks, self-help groups, cooperative banks, non-banking financial companies, microfinance institutions, etc.
Meaning of Microfinance:
Microfinance refers to the provision of basic financial services such as small loans, savings accounts, and insurance for low-income people who are economically active. It is a type of banking service provided to underprivileged and low-income households who otherwise would have no access to financial services. It lets micro-entrepreneurs and groups take on reasonable small business loans (microcredits) securely and ethically. Apart from the financial support, it also extends its support towards training, health services, networking, savings account, peer support, women empowerment, etc.
Microfinance typically covers these three important aspects:
1. Micro Loans:
These loans are offered to the borrowers without any collateral. The main key objective of providing micro loans is to make the borrowers outgrow smaller loans and make them ready for conventional bank loans. Hence, the borrower is not bound to pledge their asset as a security for repayment of the loan. This results in a soothing and non-stressful life, making the overall loan repayment rate better than conventional loans.
2. Micro Savings:
Micro Savings Accounts let the entrepreneurs open and operate savings accounts without any average minimum balance requirement. This helps the entrepreneurs form an interest in investment and learn financial discipline. Since the borrowers do not have to keep the minimum balance in the savings account, these funds are further invested in their business, ensuring they make higher returns.
3. Micro Insurance:
Micro Insurance Plans offer insurance coverage to the borrowers of micro loans at affordable premiums. It ensures that the poor people are financially protected against any mishap in the future, such as accidents, chronic diseases, etc. It covers all the possible risks that underprivileged people across the globe might have to face.
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Origin of Microfinance:
Although there has been much awareness about microfinance in recent years, the idea of microfinance is not new. In the 70s, economics professor Muhammad Yunus began to hand out small loans to his motherland - Bangladesh. In 1983, he founded the Grameen Bank, which is currently active in over 70,000 villages in Bangladesh. The bank currently employs 25,000 individuals and has 7.4M borrowers, out of which 97% are women. Today, Muhammad Yunus's concept is employed in 60 developing countries. He was awarded the Nobel Peace Prize in 2006.
The Importance of Microfinance:
Low-income individuals are generally cut off from the conventional financial market as they have no collateral and adequate income to avail of a loan, save money, and secure their families with insurance. Women are still not considered credit-worthy by financial institutions. The only option that most low-income individuals have is lending money from local moneylenders, who charge extortionate interest rates that make the loan challenging or even impossible to repay. The utmost importance of microfinance in India is that it provides access to capital to micro-entrepreneurs. Microfinance offers the borrowers security, economic growth, and the opportunity to prove themselves.
Here are a few Features of Microfinance:
1. The borrowers do not need to provide collateral:
The main feature of micro loans under microfinance is that it does not require any collateral. The borrowers can avail of a micro loan without providing any security to the financial institution.
2. It is offered to low-income individuals:
As we already discussed, the purpose of microfinance is to uplift needy and low-income individuals who contribute to the economy. It is an opportunity for needy people to escape poverty. Therefore, microfinance is generally offered to people from rural and underdeveloped areas, small businessmen, and needy women.
3. It offers small amount loans:
Since the Micro loans are offered without any collateral, and the borrowers are generally low-income people, the loan amount is usually very small. In India, the financial institutions typically offer micro-credit or micro loan amounting to Rs 20,000 to 30,000.
4. It has a short loan tenure:
As the loan amount is very small, the loan tenure offered for microcredit is also short. Although they do not provide any collateral to the financial institution, they have to repay the loan within the prescribed time period given by the financial institution.
5. The purpose is to uplift the poor people:
Microfinance is an economic tool for financial inclusion in the country that focuses on the poor section of the society to let them put their ideas into reality and generate income opportunities for them. It also ensures that low-income individuals outgrow small loans and become a part of conventional bank loans.
The types of loans offered under Microfinance are given below:
Loans for small entrepreneurs to start the business
Loans for small entrepreneurs to expand their business
Loans for women to increase their income generation
Loans for medical emergencies
Loans for home extension
Microfinance in India is operated through two channels; SHG - Bank Linkage Programme (SBLP) and Microfinance Institutions (MFIs).
1. SHG - Bank Linkage Programme (SBLP):
Self-help groups - Bank Linkage Programme (SBLP) was initiated by the National Bank for Agriculture and Rural Development, popularly known as NABARD, in 1992. The SBLP model motivates women from financially backward classes to unite together to form Self-help groups of 10-15 members. These women contribute their individual savings to their groups, which at later stages offer loans for funding income-generating activities for the members. These SHGs also offer bank loans at later stages.
This model has been a success in the past several years and has gained a lot of popularity for contributing to women's empowerment in the country. After reaching stability, these groups function independently with minimal support from NABARD, Small Industries Development Bank of India (SIDBI), and NGOs.
2. Microfinance Institutions (MFIs):
Microfinance Institutions have been gaining popularity in recent years and are considered as an effective tool to uplift underdeveloped areas and low-income individuals. They generally run on the concept of joint liability, i.e. an informal group of 4-15 individuals who seek loans either jointly or individually. These loans are typically taken for agricultural or associated activities.
Microfinance Companies In India:
Here are some of the microfinance companies that offer micro credits or Micro Loans:
Equitas Microfinance Pvt. Ltd.
ESAF Microfinance and Investments Pvt. Ltd.
Bandhan Financial Services Pvt. Ltd..
Fusion Microfinance Pvt. Ltd.
Annapurna Microfinance Pvt. Ltd.
BSS Microfinance Pvt. Ltd..
Arohan Financial Banks
Asirvad Microfinance Pvt. Ltd.
Here are the lenders that offer Microfinance Loans To Microfinance Institutions:
State Bank of India
Financial institutions play a key role in the economic development of the country, that's why they are an integral part of the economy. Although the financial institutions and financial inclusion tools in India are very strong, we as a country still lack in the implications and operations of the same. Microfinance has been playing a major role in lifting up poverty and improving the economic status of underprivileged people in society. Many public and private sector banks have been lending money to microfinance institutions, which work for women's empowerment and alleviation of poverty.
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Microfinance models in India
Small Business Model
This model places a big responsibility on small and medium enterprises. With the struggling informal sector, the SMEs can play a significant role in generating employment for the poor by providing training and options to increase their income. The government to strengthen the SMEs is doing direct and indirect interventions in the form of providing training, technical advice and enabling policy and market environment. Microcredit is the critical component, which is being provided to the SMEs, either directly or as a part of larger enterprise development Programme.
ROSCA Model or Chit Funds
Rotating Savings and Credit Associations are a means to save and borrow simultaneously. These are a group of members who make a regular fixed cyclic contribution into a common fund. At the end of a cycle, the total fund collected goes to any one member. Chit Funds are the equivalents of ROSCA in India. It addresses the need to fill the gap left by traditional banking. Easy accessibility and flexibility are the key features here. There are lakhs of ROSCA functioning in India today.
Village Based Model
Closely related to community banking and Group model, this too is community-based saving and credit model. A group of 25-50 people gets together to enhance their income through self-employment activities. They get their first loan from the implementing agency, which helps them form the community credit enterprise. They choose the members, elect their office bearers, establish their bylaws, distribute loan to the individuals and collect savings and payments. The only collateral they work with is the trust. The group stands behind the individual as collateral. NGO Model
NGOs are one of the key players in the field of micro financing. They help the cause of micro financing by playing the intermediary in multiple dimensions. They are instrumental in starting various microcredit programs and improving the credit ratings of the poor. They conduct training programs and workshops to create the opportunity to learn about micro financing. They act as a supporter for the borrower group as well as the promoters for the lending institution. Various NGOs are helping the cause of micro financing. For example, MYRADA in Karnataka, SHARE in Andhra Pradesh, RDO (Rural Development Organization) in Manipur, RUDSOVAT (Rural Development Society for Vocational Training) in Rajasthan and ADITHI in Bihar.
Individual Banking Model
Individual banking model is a shift from the group-based model. The MFI gives loans to an individual based on his or her creditworthiness. It also assists in skill development and outreach programmes. This model suits product-oriented small businesses. Co-operative banks, Commercial banks and Regional Rural Banks mostly adopt this model to give loans to farming and non-farming unorganised sector.
This model positions a third party between the lending institutions and the borrowers. These third parties are a part of a local community with information about the creditworthiness of the borrowers. They can be local moneylenders, NGOs, microcredit programmes or commercial banks for government-sponsored programmes. The credit-giving institutions could be the government agencies, commercial banks or even international donors. The intermediaries are incentivised in monetary and non-monetary forms.
Credit Unions Model
This model is based on credit union which is member driven, self-help financial institution. A union of members is formed. These members are from the common community. They agree to save together and give loans to each other at a nominal rate of interest. Compared to co-operative banks, credit unions are a democratic, non-profit financial co-operative.
Bank Guarantee Model
Bank Guarantee Model involves borrowing from a commercial bank. When an individual or a self-formed group goes to the commercial bank for credit, the bank needs collateral. This collateral comes from a Bank Guarantee, which is provided for the borrower either by external agents (donations or government agency) or internally using its member savings. The guaranteed funds can be used for various purposes such as loan recovery or insurance claims. Several international and UN organisations have been creating the guarantee funds that banks can subscribe to. Bellwether Microfinance Funds (India) is one such example.
Grameen Banking Model
A brainchild of Professor Muhammad Yunus, founder of the Grameen Bank in Bangladesh, this model works on the concept of joint liability. It promotes credit as a human right and is based on the premise that the skills of the poor are underutilized. A center is formed with limited people, and the loan is given to few people in the center.
Co-operative model is like Association and Community model except for the fact that their ownership structure doesn’t involve the poor. It’s an autonomous association of the people who voluntarily get together to work towards their common social, economic and cultural needs. The members are the shareholders and have their share in equity capital. They also share the profit. These co-operative institutions utilise the local resources and are instrumental in mobilising the micro-savings and microlending. The peer pressure ensures savings and the creditworthiness depend on the savings. Co-operative Development Forum Hyderabad is a successful example of this model. It has built a network of women thrift groups and men thrift groups. This model creates sustainable local prosperity.
Community Banking Model
This is a more formal version of association model. It treats the whole community as a unit. Microfinance is disbursed through semi-formal or formal institutions depending on the location. Sometimes a semi-formal institution governed by the community is formed with the help of external help such as NGOs who train the community members in various financial activities of community banking. These institutions have saving components as well as income generating projects. Thus, the internal financial capacity of the group is developed. It is further classified into Community Managed Loan Funds (CMLF) and Village Savings and Loan Associations (VSLA). A successful example is Royal Bank of Scotland (RBS) Foundation India, which has various microfinancing programmes to help the poorest communities across India.
Association or Group Model
Over 10-20 members of a target community form a group or association based on gender, religion, political or the cultural orientation of its members. The group makes regular savings of fixed amount in a common fund. After the successful working of the group for some months, this group is linked to a financial institution. The institution then lends credit to the association. The group is then responsible for repayment. This model takes advantage of social ties, peer monitoring and peer pressure for repayment of the loan.
In India, the Self-Help Group-Bank Linkage Program (SHG-BLP) is a prominent credit delivery method. All SHG-BLP come under NABARD (National Bank for Agriculture and Rural Development). According to NABARD, the SHG-BLP is the world’s largest microfinance programme in the world.
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State Bank of India: Sustainable Business Models in Microfinance
Comprehend Ecosystem of Microfinance and its impact on inclusive growth through studying sustainable microfinance business models.
Sustainable Business Models in Microfinance
About this course.
Comprehend the ecosystem of microfinance, understand its impact on inclusive growth, and learn to identify sustainable business models financing Micro Enterprises and Livelihood Activities.
Microfinance interventions are well recognized as an effective tool for poverty alleviation and improving socio economic conditions of the people at the bottom of the pyramid. Countries across the geographies are achieving their envisaged goals through different microfinance models.
Microfinance is identified as an important tool for empowerment of women and realisation of Sustainable Development Goals.
This Course outlines the ecosystem, business models and risk management practices in microfinance. It would enable you to understand the microfinance business models and correlate to your country’s socio-economic conditions.
You would understand the impact of microfinance in Livelihood Finance through the framework of policies, use cases and case studies.
At a glance
- Institution: State-Bank-of-India
- Subject: Economics & Finance
- Level: Introductory
A basic understanding of financing and familiarity with banking
Interest in creating impact on livelihoods, familiarity with concepts of microfinance.
- Language: English
- Video Transcript: English
- Associated skills: Business Modeling, Risk Management, Microfinance, Livelihood, Sustainable Development, Sustainable Business, Ecosystem Science
What you'll learn
Evolution, scope of microfinance and emerging trends
Microfinance eco-system- Government, Regulators, Banks/MFIs
Sustainable business models in Asian and African countries in creating livelihoods and improving living standards of the poor
Overview of Risk, Identification, Assessment and Mitigation of Risk in Microfinance Institutions
Impact of microfinance on poverty alleviation, inclusive growth and Sustainable Development Goals
Join us to learn how to use a microfinance model and create impact in the lives of the people marginalised, vulnerable, and weaker sections of the society
Background, Micro credit and microfinance, impact of microfinance, Emerging trends in microfinance
Government initiatives, policies and regulatory framework, Organizations promoting microfinance in Asian and African countries
Successful business models in Asian and African countries catering to the needs of different segments of people and financing their livelihoods.
Overview of Risk- Causative factors, impact.
Risk Management in Microfinance: identification, assessment, mitigation of risk; use cases.
Impact of Microfinance in achieving Sustainable Development Goals, overall economic development and inclusive growth.
Ways to take this course
Interested in this course for your business or team.
How to Start a Microfinance Business in India?
by Shreya shrestha | Feb 22, 2021
In the midst of the COVID-19 pandemic, when almost every industry across India was witnessing a sharp downturn in its growth trajectory, the Indian microfinance industry developed a significant amount of resilience and was able to not only sustain itself but also register a massive growth of 31% in FY20, by jumping its loan portfolio to ₹2.36 lakh crores.
While this number might appear to be astounding at first glance, in reality, the Indian microfinance industry has been steadily growing over the past decade, and a recent research by Dr Swati Sharma of Amity Business School, Rajasthan, highlighted this fact.
Along with this, a quick look at the recent Statista report outlines the consistent growth the Indian microfinance industry has witnessed over the period of FY12-FY16, and all these reports go on to establish the fact, that not only is microfinance being widely accepted by the Indian populace but also demand for their services is constantly on the rise, making the proposition of starting a microfinance business in India even more attractive.
But, how can you start a microfinance business in India?
That is exactly what we will be talking about in today’s blog post, so without further ado, let’s get started.
Table of Contents
What Is a Microfinance Institution?
- Forming a Microfinance Company in India
Registering a Microfinance Business as an NBFC
Registering a microfinance business under section 8, in conclusion.
Before we learn how you can start a microfinance business in India, one of the most important aspects we need to invest our attention to is understanding the meaning of a microfinance company.
As per the RBI (Reserve Bank of India), microfinance or microfinance institutions can be defined as being financial institutions, which extend financial instruments such as small-ticket loans to the underbanked, low-income and weaker sections of the economy.
Primarily developed with the intention of increasing financial inclusion by providing the weaker sections of the economy an affordable and easily accessible tool to rise out of poverty, microfinance in today’s India provides its benefactors with a number of advantages such as:
- Providing easy and affordable access to credit instruments to the weaker sections of the society by leveraging group lending and thus fostering a joint liability mechanism among the benefactors such that on-time repayment can be seamlessly achieved.
- Providing easy and trustworthy access to traditional financial instruments such as saving bank accounts, such that financial inclusion can be raised among the poor.
- Ousting the use and increasing reliance of the poor on moneylenders and informal credit instruments, which are infamous for charging exorbitant rates of interest, and instead providing them access to affordable credit without the requirement of guarantors and assets or collaterals.
Starting a Microfinance Business in India
Now that you understand the meaning of a microfinance institution and the advantages it extends to its benefactors let us understand how you can start a microfinance business in India.
In India, there are two main ways of starting a microfinance business.
- Start an NBFC (non-banking financial institution), which is duly registered with the RBI.
- Register your microfinance business as a Section 8 company under the Section 8 of the Indian Companies Act, 2013.
In either of the pathways you follow to start a microfinance business, there are a number of government outlined prerequisites you will need to follow. Some of the most significant of them are as shared below.
Now that you are aware of the prerequisites you need to fulfil in order to start a microfinance business in India, shared below is a rundown of the steps you need to follow in order to register it as an NBFC with the RBI.
- Register Your Company
In order to register your microfinance business as an NBFC, you will first need to form a private or a public limited company. In order to register as a private limited company, you will need to have at least two members present and a paid-up capital of ₹1 lakh, while on the other hand, if you want to start a public limited company, you will need to have at least 7 members and a minimum paid-up capital of ₹5 lakhs.
2. Raise Capital
Once you have registered your microfinance business as an NBFC, the next step of the process is to raise your capital. In the case of a microfinance business registered within India, you will need to raise a capital of ₹5 crores; however, if your company is registered within the northeastern territories of India, you will need to raise a capital of only ₹2 crores.
3. Deposit Your Capital
Once you have secured the capital amount of either ₹5 crores or ₹2 crores as applicable in your case, you will need to deposit the same with an SCB (Scheduled Commercial Bank) in the form of an FD (Fixed Deposit) and acquire a “No Lien” certificate against the same.
4. Submit Your Application
Once you have secured a “No Lien” certificate against your FD, the next step of the process is to submit your application along with your documents to the RBI. At the initial stage, you will need to fill out an online application on the RBI’s website, and post that; you will need to submit a hard copy of your application along with your newly issued licence and other certified documents with the local branch of the RBI.
Some of the most significant documents you will need in order to proceed with your application are as follows.
- Articles of Association and Memorandum of Association from your company registration.
- Incorporation certificate of your company
- A copy of your board resolution document
- A certified copy of your Fixed Deposit receipt from your auditor
- A banker’s certificate stating the net deposited fund along with the “No Lien” certificate
- Banker’s report of your company along with recent credit reports of all your directors
- Net-worth certificates of all your directors duly verified by your auditor along with the educational and professional qualifications of your directors.
- KYC and income proof of your directors
- Proof of past working experience in the financial sector, and
- Structural plan for your microfinance business
Submit all these documents with the duly registered authorities, and post additional clarifications, you will have your microfinance license from the RBI in a matter of few days.
Another pathway to register your microfinance business in India is by registering it under the Section 8 of the Indian Companies Act, 2013. In order to achieve the same, you will need to follow the below-outlined steps.
- Apply for DSC and DIN
The first step in order to register your microfinance business under Section 8 of the Indian Companies Act, 2013 is to apply for a DSC (Digital Signature Certificate) followed by a DIN (Director Identification Number). The idea behind this simply being, both these documents are crucial for approving all the e-forms you will be completing in the upcoming steps.
2. Company Name Approval
As the director of your microfinance business, once you have secured your DIN and DSC, the next step of the process is to seek name approval for your business by filling out the INC-1 form. As per the mandates prescribed by the Section 8 of the Companies Act, 2013, in order to register a microfinance business under this section, your company must contain a combination of the words, “Sanstha”, “Foundation”, or “Micro-Credit.”
3. File for Your MOA and AOA
Once you have secured the approval for your company name, the next step of the process is to file for your MOA (Memorandum of Association) and AOA (Article of Association), along with all the necessary documentation.
4. Apply for Your License
Once you have secured your MOA and AOA, the final step of the process is to submit all your documents to the RBI, along with your incorporation certificate and INC-12 form to obtain a license. Some of the most significant documents you will need to submit in order to secure a license for your microfinance business are as follows.
- Documents for identity proof of all directors as well as promoters.
- Documents for address proof of all directors as well as promoters.
- Photographs of all directors as well as promoters.
- Documents for proving ownership of registered office or rental document.
- NOC from the property owners
- Stamp duty as prescribed by the state
- Any other document which might be prescribed by the state government.
As is evident from the above explanation, it is much easier to register your microfinance business under Section 8 of the Companies Act, 2013, as compared to registering it as an NBFC.
As the demand for microfinance institutions continues to steadily increase among the Indian populace, in my opinion, starting a microfinance institution is the need of the hour. Now that you know how to get started with the registration process, go ahead and register your very own microfinance business in India today.
All the best.
The Reference Shelf
- Microfinance Company Registration [ Link ]
- Growth of Micro Finance in India: A Descriptive Study [ Link ]
- Chapter 1: Introduction [ Link ]
- Microfinance industry sees 31% rise in loan portfolio at Rs 2.36 lakh crore in FY20: Report [ Link ]
- All About MicroFinance Company Registration– The cheapest way to start the Micro Finance Company in India [ Link ]
- Gross loan portfolio volume of the microfinance industry in India from FY 2012 to FY 2016 [ Link ]
- How to Register a Micro Finance Company in India – A MFI – NBFC in India [ Link ]