Introduction of Section-8 Micro – Finance Company

The Micro finance Company is basically the financial institutions that provide small-scale financial services in the form of loan, credit or savings. These companies are introduced to ease the credit system for small businesses as they don’t get a loan from banks due to their complex process. Therefore it is commonly named as a Micro-credit, Micro-benefit organization. They offer small loans to various small businesses or households that do not have access to formal banking channels or eligibility for loans.

They provide small loans that are less than Rs.50,000 for rural areas and for urban it is Rs.1,25,000. The simplest way to register a Microfinance Company in India is to register the Section-8 Company with MCA (Ministry of Corporate Affairs). Without charging any marginal money or guarantee security. It can give loans at inexpensive rates directed by the RBI and central government. They are a huge support to all rural and agricultural development including income and employment creation.

There are basically 2 types of microfinance companies that are allowed in India, one is which has to be registered with the RBI and another is the non-profit type, which is registered as section 8 company and does not need RBI approval.

Main Features of Section-8 Micro Finance Company

  • RBI approval is not required.
  • No need of minimum capital of Rs. 5 Crores.
  • Minimum Compliances.
  • Can give unsecured loan to small business of Rs.50,000.
  • Can give loan for dwelling residence up to Rs.1.25 lakh.
  • Section-8 company have to follow the RBI guidelines on interest rate and processing charges.
  • It is a legal finance business and you can sue the defaulter in case of non-payment of loan amount.
  • In india, finance businesses are authorised only to Non-Banking Finance Companies (NBFC) and governed by RBI. NBFCs are required to get registration with RBI and comply with RBI guidelines. However, some business forms have been given exemption by the Reserve Bank of India (RBI) to do finance activities up to a certain extent.
  • The Reserve Bank of India through its master circular RBI/2015-16/15 DNBR (PD) CC.No.052/03.10.119/2015-16 Dated July 01 2015 has exempted all Section 8 Companies engaged in micro finance activities.
  • As per Para 2 (iii), Sections 45-IA, 45-IB and 45-IC of the Reserve Bank of India Act, 1934 (2 of 1934) shall not apply to any non-banking financial company which is engaged in below mentioned activities:
  • (a) Engaged in micro financing activities, providing credit not exceeding Rs. 50,000 for a business enterprise and Rs. 1,25,000 for meeting the cost of a dwelling unit to any poor person for enabling him to raise his level of income and standard of living; and.
  • (b) Licensed under Section 8 of the Companies Act, 2013; and.
  • (c) Not accepting public deposits as defined in paragraph 2(1) (xii) of Notification No. 118 /DG (SPT)-98 dated January 31, 1998.

Loan Limits by Section-8 Micro Finance Company

  • Borrower with a rural household annual income not exceeding Rs. 1,00,000 or urban and semi-urban household income not exceeding Rs. 1,60,000 will be eligible.
  • Loan amount will not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000 in subsequent cycles.
  • Total indebtedness of the borrower will not exceed Rs. 1,00,000.
  • Tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 30,000 with prepayment without penalty0.
  • Loan to be extended without collateral.
  • Aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the mfis.
  • Loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

Benefits of of Section-8 Micro Finance Company

Government of India and the Reserve Bank of India have created conducive policy framework for Microfinance Institutions (MFIs) to provide necessary legitimacy and impetus to the sector. The following are the benefit of Micro Finance Business.

  • Provide access to funding
  • Encourage self-sufficiency and entrepreneurship
  • It offers a better overall loan repayment rate than traditional banking products.
  • Strengthen financial condition for some days till situation gets better.
  • Help in meeting credit needs for such a population range from emergency loans, consumption loans, business loan, working capital loan, housing etc.

Basic Documents required for Incorporation of Section-8 Micro- Finance Company.

  • Aadhar Card, Aadhar number is now a necessity for applying for any registration in India.
  • Income tax return can only be filed if the person has linked his PAN card with Aadhar number.
  • Address proof will be required for all directors and shareholders of the company to be incorporated.
  • For Indian nationals, PAN is mandatory. For foreign nationals, apostilled or notarised copy of passport must be mandatorily submitted.
  • Residence proof documents like bank statement or electricity bill should not be more than 2 months old.
  • All documents submitted must be valid
  • Register office of all companies must be in India .If it is a Rented Property, Rent agreement and NOC from a landlord. If it is a Self-owned Property, Electricity bill or any other address proof.
  • Documents submitted must be valid and not more than 2 month old.

Author Bio

Name: Parveen
Qualification: CS
Company: Kumar Parveen & Associates
Location: Noida, Uttar Pradesh, IN
Member Since: 03 May 2017 | Total Posts: 2
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9 Comments

  1. SOUNDARAYA KUMAR says:

    We are a new startup Sec-8/25 company, and wish to pursue the microfinance activity in its true spirit. We have taken this, as here the entry barrier is low, but hope to scale up the ladder in due course. To make our story a success story, we wish to start with good preparation. Right advice/preparation/ information and business model is the prerequisite for that, particularly in INDIA, which is nothing but lawyers paradise. I seek your advice and consultancy for following aspects:

    A. Clarification: Clear and unambiguous interpretation of certain provisions so that a layman like me can understand it clearly.

    B. Available Options: There are certain limitations for the financing activity of Sec-25/8 company I would looking for the alternates/options available to overcome these limitation.

    C. Business Model: Would seek your advice in developing a sustainable and growth oriented business model/plan.

    The specific advice is needed for:

    Clarification: please clarify the following provisions in plain and certain term

    · Loan amount will not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000 in subsequent cycles.

    · Total indebtedness of the borrower will not exceed Rs. 1,00,000.

    · Aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the mfis.

    Questions/Clarifications regarding above provisions:

    1) What is the relevance of cycle? Please clarify with example, what it means and what it does not mean. Also where it is applicable, and where it is not applicable.

    2) If a MFI is restricted to provide a loan of Rs.60,000/- only, how come the total debt exceeds Rs.1,00,000/-

    3) What is the meaning of third provision (aggregate loan-whether it is aggregate loan from the same MFI or from multiple MFI).

    4) Can the same person/unit be financed for more than one purpose concurrently? Is there any provision regarding limitation on concurrent funding? Can another purpose of loan be non income generation.

    Alternatives/Options to overcome Limitations:

    · Borrower with a rural household annual income not exceeding Rs. 1,00,000 or urban and semi-urban household income not exceeding Rs. 1,60,000 will be eligible.

    · Loan amount will not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000 in subsequent cycles.

    Specific advice regarding clarifications:

    1) How to overcome the first limitation (end to end solution) , as this would seriously limit the customer base.

    2) How to overcome the second limitation, as this would seriously limit our role and competency in implementing the purpose of sec-8/25 company.

    Finally, discussion about a sustainable and growth oriented business model. Along with an option to interact with you in future also (paid advice only) is what I am interested in the long run.

    The payment Terms: as we have discussed (Rs. 15000/-). I would send 7500/-as advance, and rest amount, after we reach to some working model. Kindly send your bank account for transferring the amount.

    We are ready to take paid consultancy services for the above topic.

    Regards

    Soundaraya Kumar (M: 9811677417)

    Director, CAPS-EDF,

    5-D, Pocket-4 (EHS Flats), MIG Complex

    New Delhi, Mayur Vihar Phase-3, New Delhi-96

  2. DHRUMIL PATEL says:

    hii sir

    recently i have applied RUN for the same section 8 company whose object is micro finance activities and got re submission that ……..

    “Name/Objects of the company being incorporated as per Section 8 of the Companies Act, 2013 should not include Micro-Finance/Micro Benefit/Micro-Credit activities. Resubmit accordingly.

    please suggest

      1. Kavita Malani says:

        I had also received resubmission same reply. CRC is not approving any application for setting up Micro Finance Section 8 Company. In the situation, the exemption given by RBI has no use

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