REGISTER A MICROFINANCE COMPANY

Basically, there are three kinds of charges that can be imposed by the Micro Finance Company.

The interest Charge – The average rate of interest should not be exceeded by 26%.

The Processing Charge – The processing charge should not exceed 1% of the gross loan amount.

Insurance Premium – Only the actual cost of insurance for life, group, health and others is to be charged and none of extra money is permitted according to RBI policy.

The rate of interest charged by Micro Finance Companies should be which one is lower :

Average base rate multiplied by 2.75% Or Cost of funds along with 12% margin

According to press release on 1st April, 2017, the average base rate was 9.35%.

Under Section 8 Company, there is no permission to accept deposits. Besides the company needs to invest their own capital and commence your micro finance business. In addition, funding may be enhanced by collecting donations.

If you want to register a NBFC company and want to make an investment of Rs 5 crore into it, there is no acceptance to deposits. According to RBI process, NBFC non deposit taking Company should be registered initially. Afterwards application must be done for deposit taking status from the RBI (Reserve Bank of India).

If you plan to make registration of your own NBFC, it is suggested to begin with Section 8 Company. Skills are required to be tested and then move further.

Help in channelizing small savings –

The small savings of the members contribute to the funds of and avail credit from Nidhi companies.

Under Micro Finance Companies, loans are not very difficult. Unsecured loans are given against weekly or monthly repayments. Interests are imposed mostly in between 20% to 26%. In addition, following features are also crucial :

The interest on loan is to be imposed on reducing balance method.

Differential rate of interest to the customers can be imposed by NBFC but difference should not exceed 4%.

A loan card should be issued to each member of the companies narrating all the terms and conditions and rate of interest.

The effective rate of interest must be shown by the micro finance companies in all the offices.

If there is not any repayment within 90 days, same should be considered as non performing asset. Although rules of provisions are not applicable for Section 8 companies.

There are a number of compliances that are needed to be complied by Micro Finance Company. Following are the most important compliances :

Company Act--Section 8 company requires fulfilling the Company Act like any other business.

RBI Compliance--Company is needed to meet the terms and conditions of RBI even if this is not important to register with the RBI.

Other--There are certain other laws that are to be satisfied also such as PMLA and others.

It can provide unsecured loan up to Rs 50000 for business purpose and Rs 125000 for residential dwelling.

A processing fee up to 1% can be imposed on the loan amount.

Although branches can be opened as no particular restrictions are there yet, it is suggested to open in limited numbers.

Maximum interest up to 26% can be charged according to calculations.

A Micro Finance Company cannot do the following :

It cannot treat into any other business since it is exempted by RBI for micro finance.

Profit cannot be taken directly from the company but can be taken as official expenditure, salary and others.

It is not possible to take deposits from common public.

Following are the advantages of Microfinance Institutions :

It encourages entrepreneurship and self-sufficiency.

Easy access to funding

Improved general loan repayment rate as compared to traditional banks

It strengthens the financial state by meeting the credit requirements of needy individuals by offering a different kind of loans for example business loan, emergency loans, housing loan, working capital loan etc.

RBI rules are required to be followed

Deposits cannot be accepted

Profits cannot be taken from the company

Ques: What is known as a Micro Finance Company?

Micro finance company provides the representatives of the poor level of the population who are not enormously poor with credit and other convenient services. A Micro Finance Company is a kind of NBFC that cannot have acceptance to get deposits. However, they can execute small lending tasks to finance the low-income group of the people such as agriculturist, farmers, horticulturist and others.

Ques: What are the documents needed for the registration of a Micro Finance company?

Following documents are important for Micro Finance Company Registration procedure :

Certified MOA and AOA

Certified COC and COI

Audit report

Board Resolution Certificate stating that the norms mentioned in RBI Act, 1934 are followed

Certified copies of highest educational qualifications of the directors

Ques: What are the advantages of a Micro Finance Company?

Let us know the benefits of a Micro Finance company :

Continuity

Improved payment rates

Better access

Ques: What are the disadvantages of a Micro Finance Company?

Micro Finance Company has following disadvantages :

Higher cost

Limited growth

Strict regulation

Ques: How is the regulation procedure of Micro Finance Companies?

RBI regulates these companies according to the master circulars regarding NBFC-MFIs. These depend on the RBI circular no: DNBS (PD) CC No: 395/03. 10.38/2014-15.

Ques: Why interest rate is higher as compared to traditional bank?

The rate of interest in Micro Finance Business is more than traditional banks as small loans are likely to be more costly to process as compared to bigger ones.

Ques: Who are known as the clients of the Microfinance Companies?

The clients are either above or below poverty line that cannot access to financial services from other financial organizations like Bank.

Ques: What is known as rate of Interest imposed on the loan?

The new rate of interest is 19.25% to 20% that was effective from 10th April 2018.

Ques: What criteria are there to get loans from MFIs?

Following criteria are there to acquire loans from Micro Finance Companies :

Total debt of the clients should not be more than Rs 100000

Client is not permitted to borrow from more than one MFI

Client should have their own house

Earning activity of client is compulsory

A bank account of client is essential

Documents of ID and proof of client are mandatory

Ques: What are the Maximum and minimum loan amounts?

For on-ward borrowing :

Rs 50 lakhs to 50 crores

For Women borrowing :

Rs 15 lakhs to Rs 35 lakhs

For Micro-entrepreneurs :

1 Lakh to 10 Lakhs

Income Tax Returns –

Annual returns must be filed by Nidhi Company by 30th September of the next financial year.

Ques: What is Nidhi Company?

A Nidhi Company is approved under section 406 of the Companies Act 2013 and belongs to the non-banking Indian finance sector. Their business includes lending and borrowing money among members. They are also called benefit funds, permanent fund, mutual benefit company and mutual benefit funds. They are governed by Ministry of Corporate Affairs. Reserve Bank of India has the authority to issue directions related to activities to take deposit. These companies manage their shareholder members only.

Ques: Why Nidhi Company should be registered?

Low mobilization of deposits

Perfect for middle and lower-income groups

Loan at lower interest rates

Secured and on-time returns

There is not any extra interference

Ques: What are the post-incorporation needs for Nidhi Company?

Following conditions should be fulfilled within 1 year since when the company is commenced :

Minimum 200 shareholders are needed

At least Rs 10 lakh net owned fund is required

At least 10% of the unpaid deposits should be taken as encumbered deposits

Deposits cannot be accepted by company exceeding 20 times of net owned fund

Ques: What is known as DNI?

Director Identification Number or DIN is allotted to a potential director or an existing director of any company that gets incorporated or to be incorporated. Ministry of Corporate Affairs issues DIN which is unique identification number.

Ques: What is called DSC?

Digital signature certificate denotes signing the important documents by an authorized individual digitally or electronically. This is used for signing the electronic forms only. It is not applicable for physical documents.

Ques: Can Minor become a director?

No, Minor cannot be a director as DIN is essential. To obtain a DIN, an individual should be at least 18 years or above.

Ques: Can foreign nationals or NRI be a director of an Indian organization?

Yes, foreign nationals or NRIs can be a director and shareholder of an Indian organization. The company should include at least one Indian resident as a Director on the Board of Directors.

Ques: Can a salaried individual be a director of a company?

Yes, a salaried individual can be a director of an organization if he is allowed by the employment agreement.

Ques: What is known as Authorized Capital?

It includes maximum acceptable amount of share capital which can be issued to shareholders by a company. Authorized share capital can be changed by a company when it is needed from time to time. It depends on the need of the organization subject to approval of members or shareholders.

Ques: What is meant by Paid-up capital?

Paid-up share capital is called Issued share capital of the Organization. This is an amount of shares issued to the share holders by an organization.

Ques: What is known as Registered Office?

The registered office of an organization is the main place of a company to do business. This place is used for sending entire official correspondence.

Ques: What is called MoA (Memorandum of Association)?

As par Section 2(56) of the Company Act, 2013, the term "Memorandum" denotes a company's memorandum of association. This is alerted from time to time following any past company law or of the Act. This is a charter document of an organization that includes essential details of the company.

Ques: What is known as Articles of Association?

Articles of Association are by-laws of an organization. This includes Rules and Regulation pursued by the organization. It incorporates duties, objectives and authorities of the Board of Director like voting rights, borrowing capacity, process to issue and transfer of shares.

Ques: Is it possible to enhance Paid-Up Capital and Authorized Capital after completing of incorporation procedure?

Yes, Paid-up capital and authorized capital can be enhanced after incorporation procedure.

Ques: Are Nidhi Companies controlled by Reserve Bank of India?

No, the registration and regulation procedure of Nidhi Company is not controlled by core provisions of Reserve Bank of India.

Ques: How Nidhi Company Registration procedure is different from other NBFCs registration process?

RBI does not control Nidhi companies and its registration needs a smaller amount of capital. In case of NBFCs, the need of paid capital is 2 crore.

Ques: What is known as regulatory authority of Nidhi Company?

Registration and regulation of Nidhi Company is managed by Ministry of Corporate Affairs. According to the Provisions of Nidhi Rules, 2014, all the activities are completed.

Ques: What is meant by Nidhi Rules?

Nidhi Companies are not controlled by RBI. Therefore to make transparent and easy operations of Nidhi Company, Nidhi Rules 2014 has been introduced by Central Government. Governing principles for Nidhi Company operations are included in these rules.

Ques: From whom deposits can be taken by a Nidhi Company?

Once registration of Nidhi Company is completed, deposits can only be accepted from the registered members.

Ques: Who can be a member of Nidhi Company?

Following criteria are to be satisfied in order to be a member of Nidhi Company :

The member must be at least 18 years or more.

No trust or corporate body can become a member. Member should be an individual.

Ques: Is RBI approval is necessary to continue business after the registration of Nidhi Company?

Approval of RBI is not compulsory for them. Once registration of Nidhi Company is completed, business can be started.

Ques: Is Micro Finance Business conducted by Nidhi Company in India?

The term microfinance denotes small credit facility. This is well-known business entity in rural and semi-urban places. However RBI approval is compulsory to perform microfinance business. Any big NBFCs can do this.

Ques: Whether debt securities or preference shares can be issued by Nidhi Company?

No. Following securities cannot be issued by Nidhi Companies :

Debentures

Preference Shares

Other Debt Securities

Ques: Is there any limit of loan that a Nidhi Company can offer to its members?

In case of Nidhi Company, loan limit depends on the amount of deposits that it keeps. Specified limits are as follows :

Ques: Whether Nidhi Company Operation is allowed in two states?

Nidhi Company is not allowed to perform its operation outside the state where it is registered in.

Ques: What are the minimum needs when the registration of Nidhi Company is completed?

Once registration procedure of Nidhi Company is done, following needs are to be met within one year :

At least Rs 10 lakh should be maintained as net owned funds

Minimum 200 members should be registered

Out of entire unpaid deposits, 10% should be unencumbered term deposits

The ratio of net owned funds to deposit must be 1:20

Ques: Is it legitimate to advertise the activities of a Nidhi Company?

No, Nidhi Company is not allowed to advertise its activities. The main aim of Nidhi is to facilitate the habits of saving and thrift among the members. It prevents request for deposits to non-members through promotions.

Nidhi Company cannot remit any type of incentive or brokerage in order to promote grant of loan or mobilization of deposits to members.

Ques: Can a Nidhi Company buy securities of other company?

No, Nidhi Company cannot buy shares or securities of other company or institutions.

Ques: Can a current account be opened by a Nidhi Company with its members?

No, Nidhi Company cannot open a current account with the members.

Ques: Is it possible to acquire another company by a Nidhi Company?

No, Nidhi Company is not permitted to do that through buying its securities. It does not have power to access its management or modify the components of its management.

For such activity, prior approval of regional director is to be obtained after a special resolution is passed in general meeting.

Ques: Is there any task performed by a Nidhi Company except borrowing and lending permitted by law?

No, Nidhi Company is not allowed to perform any other type of task on its own name except borrowing and lending.

Ques: Is there any restriction to open another branch of Nidhi Company?

Yes, it cannot open another branch till a net profit after paying tax is earned consecutively for 3 years since when its registration is completed.

Ques: What is the number of branches opened by a Nidhi Company?

Once the criteria of earning profits for 3 consecutive years are fulfilled, 3 branches can be opened by a Nidhi Company. The branches must be in the same district where the registration of Nidhi Company is completed.

If more branches are to be opened outside or inside the district, it is compulsory to get previous permission from the regional director.

Ques: Whether unsecured loans can be issued by Nidhi Company?

No, only secured loans can be issued by Nidhi Company to its members.

Ques: What types of securities are needed by Nidhi Company to issue loans to its members?

Following securities are required by Nidhi Company to issue secured loans to its members :

Immovable Property

Gold, Silver and other valuable metals including jewelry

National saving certificate, government securities, fixed deposit receipts, insurance policies and others

Ques: Which loans cannot be issued by Nidhi Company?

Following kind of loans cannot be issued by Nidhi Company :

Vehicle / Asset finance

Hire-purchase

Microfinance