Microfinance institutions are the institutions that offer financial services to underserved low-income populations. These generally cater to their smaller financial needs, which conventional banks and financial entities do not typically address. Reserve bank of India (RBI)
Section 8 – Micro finance companies
Micro-finance companies are registered under section 8 of the Indian Companies Act, 2013. Its objective is to provide financial aid to small business groups that are not included in the formal banking system. This company offers loans, insurance, and other products to its clients without requiring any collateral or security. The aim of a Section 8 Microfinance Company is to promote social welfare and economic development among the poor and marginalized sections of society.
Approval from Reserve bank of India (RBI)
The Reserve bank of India only permits Non Banking Finance Companies (NBFCs) to engage in financial operations. However, RBI allows Micro finance companies registered under Section 8 of the Companies Act, 2013 to undertake financial activities within defined limits.
Regulatory Exemptions of Section 8 Microfinance Companies
- No explicit approval required from RBI.
- Unlike other such companies, the minimum requirement of 5 Crore capital investment is not required under Section 8 Micro finance companies.
- Unsecured loan can be offered up to INR 50,000 to small businesses and up to Rs. 1.25 lakh for primary residential purposes.
- With all the exemptions, these companies have the legal\ right to recover their loans incase of defaults.
- Exemption under RBI Act: The RBI’s master circular dated July 1, 2015, exempts Section 8 companies engaged in microfinance from sections 45-IA, 45-IB, and 45-IC of the RBI Act, 1934, provided they focus on micro-lending within specified limits and do not accept public deposits.
Revised RBI Guidelines on Section 8 Microfinance Companies
RBI has revised Guidelines on Section 8 Microfinance Companies, which are explained below:
- RBI has increased the limit of loans collateral-free lending to households with an annual income of up to INR 3,00,000.
- Repayment Cap: Ensures monthly loan repayments do not surpass 50% of the household’s monthly income, promoting financial responsibility.
- The loan limit for qualified clients ha been extended up to INR 2,40,000 for aiming to meet more significant financial needs.
- RBI insists on keeping interest rates and other associated charges moderate, with supervisory audits to ensure compliance.
- Section 8 microfinance companies shall issue Loan Cards to each borrower. This card includes details of the loan amount, interest rate, processing fees, and applicable penalties, increasing transparency and borrower awareness.
- If a Section 8 microfinance company’s assets exceed INR 100 crore, it must transition to an NBFC-MFI within three months.
- There is no need for changing its non-profit status.
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