How to start small finance company or NBFC company in India – About Finance company, Types of company, Documents Requirements, Registration process etc.
Introduction about indian market of Finance
India is one of the largest emerging markets for Small Finance Companies or Micro-Finance Institutions (MFI). With a huge part of our population based in villages and rural areas, where the traditional banking assistance is out of reach. People in the lower income group take the informal channel of financial assistance like moneylenders and pawnbrokers. Generally, this means paying high-interest rates and be forever under debt. Such debtors are not able to benefit from the economic development of the country.
How to start a Small Finance Company in India
Starting any business requires an in-depth knowledge of the needs of the customer. Additionally, you need to have a solid business plan in place outlining the path to success. Likewise, you need to have a step-by-step process for how to start and make your Small Finance Company, success in India. For this, the first prerequisite is to comply with the strict regulations and meet initial funding requirements.Before setting up your Finance Bank, you need to decide whether you want to set your MFI as a Profit Institution or as a Non-Profit Institution.
Types of Financial Company:
- Non-profit micro finance Company
- Small profit making finance company
Starting a Non-Profit Micro Finance Business
An MFI under Non-Profit Organization is registered as Trusts/Societies/Companies under the relevant acts. Those are Indian Trust Acts 1882/Societies Registration Act 1860/Companies Act 2013, respectively. Micro-Finance, generally termed as Micro-Credit, need to take Section 8 Company Registration of Companies Act 2013.
How to start a Small Profit-Making Finance Company in India
A Profit Making MFI can be registered either as a Non-Banking Financial Company (NBFC) or as a Co-operative Society. Incidentally, an unregulated Non-Profit NGO can be transformed into a regulated, For-Profit Institution, as well.
This commercializing the entity would attract market investors. The supervising and regulatory authority is RBI, where they are registered. Their performance and other standards need to be maintained and, if possible, improved, to assure good investment for the investors.
Registration Process For Non-Profit Micro-finance Business through Section 8 Company
You can start Small Finance NGO registered as a Society, Trust or a Company, in India. Another name for NGO registered as a Company is Section 8 Company.
Such Section 8 Companies have higher credibility amongst Government departments, Donors, and another stakeholder. Therefore, it is an advisable path to your Small Finance Business. Listed below are some of the benefits and ease of doing business as a Section 8 Company:
- The registration process, under Section 8 of the Companies Act, is much cheaper and easier,
- RBI approval is not mandatory. Only required to comply with its guidelines concerning Interest Rates and Processing Charges,
- Number of Compliances required is much lesser as compared to other MFI,
- There is no Minimum Ceiling for Fund-Raising,
- Can grant Unsecured Loans of an amount up to Rs. 50,000, to Small Businesses. Limit to grant a loan for Dwellings and Residences is Rs. 1,25,000,
- Loans can be granted following the guidelines under the relevant Sections,
- The Average Interest Rate should not be more than 26%.
- The Processing Charge should not be over 1% of the Gross Loan Amount.
- In the case of Insurance, the Premium charged must be the Actual Cost of the Insurance of the Group/Life/Health and nothing extra.
- Not allowed to accept public deposits.
⇒ Directors/Shareholders are to submit Copies of PAN Card, Adhaar Card, Address Proof (Utility Bill, Bank Statement, Rent Agreement etc.).
⇒ Address proof for the Registered office of the Company would include Ownership Proof (Utility Bill etc.), NOC.
Process of Finance Company as a Section 8 Company Step-by-Step:
To start your Finance Company as a Section 8 Company, the minimum number of Directors is 2, in India.
- Obtain their DSC and DIN.
- Choose and get the Name approved from the ROC. The name has to be unique, that reflects your brand. A maximum of 6 names can be filed at one time.
- Apply for a License to do the social work in India, from the Central Government.
- On receipt of License approval, apply for Incorporation. The application has to be enclosed with all the important attachments like MOA, AOA, Declarations etc. Wherein, your Company will be issued a Certificate of Incorporation.
- Obtain PAN and TAN for your Section 8 Company.
For Small Finance Company as NBFC
An NBFC-MFI is allowed to provide the Micro-Loans only to a special type of clients/borrowers. Other essential features are:
- At least one of the director or the company itself must be experienced in the financial services of not less than 10 years.
- Small Finance Company, as NBFC can use Self Help Groups (SHG) to intermediate the financial transactions.
- MFI is a Non-Deposit taking NBFC.
- The License to operate an NBFC is to be applied from RBI, subjected to the fund capital.
- An NBFC-MFI has to have a paid-up capital of Rs. 5 Cr.
- It has to be a member of the Credit Information Companies (CICs).
- Additionally, it has to be a member in at least one Self-regulatory Organisations (RBI, SEBI, IRDA, NABARD or SIDBI, to name a few).
- The Small Finance Company, for registration as an NBFC, shall have CIBIL membership.
- Any borrower cannot be lent an amount over Rs. 50,000 at first borrowing. The upper limit for all subsequent borrowings is Rs. 1 lakh.
- However, a particular borrower shall not have loans exceeding Rs. 1 lakh, at one time.
- The loans would be provided to borrowers having an annual income of less than Rs. 1 lakh (for rural areas) or Rs. 1,60,000 (for semi-urban areas).
- The Interest charged would be lower of: (a) [Cost of Funds + 12% Margin], or (b) [Average Base Rate x 2.75].
- At least 10% of the total assets of the small finance company should be loans.
Documents Required for registration under RBI (Reserve Bank of India):
- Director’s/Shareholder’s KYC and income proof.
- Director’s Education/Professional qualification proof, along with proof of the work experience in the field of the financial services sector.
- Net-Worth Certificate of the Directors, Shareholders and the Company.
- Latest Credit Report of the Directors and the Shareholders.
- MOA & AOA of the NBFC depicting the Financial/Investment/Lending business.
- Company Incorporation Certificate.
- Obtain a Banker’s Certificate of No Lien supporting Net Owned Funds (NOF) of Rs 5 Cr.
- Banker’s Report about the Company and its group.
- A detailed action plan about the Loan Products, Fair Practice Code, Credit and Risk Assessment Policy.
- Organization’s Structure Plan.
- Decision-making process for Approval or Rejection of a Loan Application.
- Board Resolution passed in favour of NBFC formation.
Procedure to Register the Micro Finance Company (MFI)-NBFC
Register a Company:
The first step is to register the Micro Finance Company (MFI) as a Company. The Company can be registered as a private limited company or a public limited company.
Raising Authorised and Paid-up Capital to 2 Crores:
As per the regulation NBFC required to have a net worth of minimum Rs 2 Crore. So, after formation, the authorized and paid-up capital shall be raised to 2 crores.
Deposit Rupees Two Crore in Fixed Deposit and obtain Certificate:
After raising the capital amount, the next step is to deposit the sum of Rs.2 crore in Fixed Deposit and obtain a certificate of no lien from the bank.
Application to RBI for Registration:
The next step is to file an online application with RBI for NBFC registration as a Micro Finance Company. The application shall be accompanied by the required documents. On submission of application, the Company gets a Company Application Reference Number. Which is utilized in further all communications with RBI?
Submit the Hard Copy to the Regional Office of Reserve Bank of India (RBI) office
Once the application is filed, a hard copy of the application along with all the necessary documents are to be sent to the regional office of the Reserve Bank of India.