NBFC Micro Finance Registration

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NBFC Micro Finance Registration Registration

The term “micro finance” means various types of financial services such as credit, savings, micro-insurance, remittances offered to low income population. The main purpose is to provide permanent access to financial services which include insurance, savings and fund transfer to people with low income and in rural and semi-urban areas. Micro Finance Companies are a great support to rural and agricultural development and income and employment generation. Microfinance is defined by NABARD as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and urban areas provided to customers to meet their financial needs; with only qualification that (1) transactions value is small and (2) customers are poor.” Micro Finance Business can be registered in different forms as NBFC MFI (Registration with RBI) OR Section 8 Company (Registered under Companies Act 2013)

Many Micro finance institutions are obtaining Non-banking finance company (NBFC) status from RBI to get wide access to funding, including bank finance.

MEANING OF NON-BANKING FINANCIAL COMPANY MICRO FINANCE INSTITUTION (NBFC-MFI):

NBFC-MFI is a non-deposit taking NBFC (other than Section 8 company) having minimum net owned fund of Rs 5 crores (if registered in the North Eastern Region- Rs 2 Crores) * and shall not have less than 85% of its assets in the nature of qualifying assets meeting the following criteria:

  • Loan disbursed by an NBFC-MFI to a borrower with rural household annual income not exceeding Rs. 1,25,000 or urban and semi-urban household income not exceeding Rs 2,00,000;
  • Loan amount does not exceed Rs 75000 in the first cycle and Rs 1,25,000 in subsequent cycles;
  • Total indebtedness of the borrower does not exceed Rs 1,25,000;
  • Tenure of the loan not to be less than 24 months for loan amount in excess of Rs 30000 with prepayment without penalty;
  • Loan to be extended without collateral;
  • Aggregate amount of loans, given for income generation, is not less than 50 percent of the total loans given by the MFIs;
  • Loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower.

After satisfying the following conditions, any Non-Banking Financial Company can operate as Micro-Finance Institution. A Non-Banking Financial Company (NBFC) not meeting the above criteria, shall not have more than 10% of its total assets as loans.

* SCALE BASED REGULATION(SBR); A Revised Regulatory Framework for NBFCs:

To tighten strict control over NBFCs, RBI has prescribed Guidelines on Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs on 22nd October 2021 which will be effective from 01st October,2022. Regulatory minimum Net Owned Fund (NOF) for NBFC-MFI shall be increased to ₹10 crore. The following is prescribed for the existing NBFCs to achieve the NOF of ₹10 crore:

NBFCs

Current NOF

By March 31, 2025

By March 31, 2027

NBFC-MFI

₹5 crore (₹2 crore in NE Region)

₹7 crore (₹5 crore in NE Region)

₹10 crore

Documents Required for NBFC Micro Finance Registration

Firstly, a company has to be incorporated under the Companies Act, 2013. The company may be a private company or a public company. Secondly, after incorporation, the company has to register itself with the Reserve Bank of India, since a Micro Finance Institution (hereinafter referred to as MFI) is regulated by the Reserve Bank of India.

The list of documents to be filed with RBI for registration are given below:

Sr. No.

Requirements to be complied with and documents to be submitted to RBI by Companies for obtaining certificate and Registration from RBI as NBFC

1

Certified copies of Certificate of Incorporation and Certificate of Commencement of Business in case of public limited companies.

2

Certified copies of extract of only the main object clause in the MOA relating to the financial business.

3

Board resolution stating that:

a)     the company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI

b)     the company has not accepted any public deposit, in the past (specify period)/does not hold any public deposit as on the date and will not accept the same in future without the prior approval of Reserve Bank of India

c)      the UIBs in the group where the director holds substantial interest or otherwise has not accepted any public deposit in the past /does not hold any public deposit as on the date and will not accept the same in future

d)     the company has formulated “Fair Practices Code” as per RBI Guidelines

4

Copy of Fixed Deposit receipt & Bankers certificate of no lien indicating balances in support of NOF

5

For companies already in existence, the Audited balance sheet and Profit & Loss account along with directors & auditors report or for the entire period the company is in existence, or for last three years, whichever is less, should be submitted

6

Copy of the certificate of highest educational and professional qualification in respect of all the directors

7

Copy of experience certificate, if any, in the Financial Services Sector (including Banking Sector) in respect of all the directors

8

Banker’s report in respect of applicant company, its group/subsidiary/associate/holding company/related parties, directors of the applicant company having substantial interest in other companies. The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

Note: Please provide bankers report from all the bankers of each of these entities and provide the report for all the entities. The details of deposits and loans balances as on the date of application and the conduct of the account should be specified.

In addition to the Documents required for registration as Type II - NBFC-ND, following list of documents / information to be submitted by the NBFC-MFI applicant:

  • Board resolution stating that:
    • the company will be a member of all the Credit Information Companies and will be a member of at least one Self-Regulatory Organisation.
    • the company will adhere to the regulations regarding pricing of credit, Fair Practices in lending and non-coercive method of recovery as per RBI Guidelines.
    • the company has fixed internal exposure limits to avoid any undesirable concentration in specific geographical locations.
    • the company is not licensed under Section 25 of the Companies Act, 1956 / Section 8 of the Companies Act, 2013.
  • Roadmap for achieving 85% qualifying assets.

Features Of Micro-finance Institution:

  • Micro Finance grants financial services to low income group.
  • Size of the loan given by MFI is small.
  • Repayment period of the loan is small.
  • No requirement of Collateral security
  • Concept of Self-Help Group (SHGs) is the most exciting discovery in the context of microfinance.
  • The end use of the loan is flexible
  • Loans given are mostly group loans, trickling down to individuals.
  • Transaction cost is low, due to group lending.

Frequently Asked Questions

Net assets mean total assets other than cash and bank balances and money market instruments; and Qualifying Assets means a loan satisfying the above-mentioned criteria.

Such NBFC shall not have more than 10% of its total assets as loans meeting “Qualifying Assets” criteria as defined in the Directions.

Membership to the SRO is not mandatory. However, NBFC-MFIs are encouraged to voluntarily become members of at least one SRO.

The industry associations (SROs in this case) are expected to facilitate compliance by the Non-Banking Financial Companies that are engaged in microfinance (NBFC-MFIs) with the regulations and code of conduct and function in the best interest of the customers of the NBFC-MFIs. The membership of NBFC-MFIs in the industry association/SRO will be seen by the trade, borrowers and lenders as a mark of confidence and removal from membership will be seen as having an adverse impact on the reputation of such removed NBFC-MFIs.

All NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which shall not be less than 15 per cent of its aggregate risk weighted assets. The total of Tier II Capital at any point of time shall not exceed 100 per cent of Tier I Capital.

ROLE OF COMPLIANCE CALENDAR LLP

Large number of Microfinance Institutions are registering as Micro Finance NBFC with RBI to get wide access to funding, including bank finance. Micro Finance NBFCs provide financial services to low income population. Compliance Calendar LLP has team of experienced professionals who can provide you services with respect to NBFC Micro Finance Company Registration and help you to comply with RBI Regulations relating to Micro Finance NBFC in an efficient manner. If you are looking to register your Non-Banking Financial Company (NBFC) as Micro Finance, you are welcome to connect with us at info@ccoffice.in or call us at +91-9988424211 to book your one-time free consultation and we will be more than happy to help you out.