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Microfinance Company provides small loans and other credit services to stakeholders. These financial institutions would lend to SMEs and other businesses that cannot acquire credit from banks. Setindiabiz provides its services to set up a Microfinance Institution in India.
Meaning of Micro Finance Company
Micro Finance Companies, also known as Micro-credit organisations, are the organisations that help small businesses get loans because banks don’t give them money due to lengthy processes. They provide small loans to small businesses and households that don’t have access to formal banking channels or can get loans because they don’t have enough money.
People who live in rural areas can get small loans worth less than Rs.50,000, and people who live in cities can get loans worth up to Rs.1,25,000. A Section-8 Company is the easiest way to start a Micro Finance Company in India. You don’t have to pay any extra money or put up any guarantee security to create a Section-8 Company with the MCA (Ministry of Corporate Affairs). A microfinance company can give loans at low rates that the RBI and the government set.
Further, it should be pointed out that a microfinance institution or a company is a Non-Deposit Taking NBFC and is not the same as a Section 8 company. It also has to follow the rules and regulations set by the Reserve Bank of India Act 1934 and the rules and regulations set by the Reserve Bank of India.
Type of Micro Finance Company
Basically, a microfinance company is a financial institution that helps people with small amounts of money get a loan, credit, or save money. There are companies that help small businesses get loans because banks don’t give them money because they have a long process. As a result, it is known as a “micro-credit, micro-benefit organisation.” There are two types of microfinance companies that are allowed in India. The first type is NBFC that has to be approved by the RBI, and the second type is a non-profit company that doesn’t have to be approved by the RBI and is incorporated as a section 8 company under the Companies Act, 2013
Difference between an NBFC and Section 8 MFC
| S.No | Particulars | As NBFC | As Section 8 |
| 1. | Approval From RBI, | Yes, It is Mandatory | Not Required |
| 2. | Net Owned Fund Requirement | Minimum 5 Crores | No Minimum Requirement |
| 3. | Director Experience | There must be at least one director who has worked in the financial industry for more than 10 years. | No Experience Required |
| 4. | Limit on Loans | The maximum loan disbursal should be within 10% of total assets | Can give unsecured loan Up to 50,000 to small businessLoan up to Rs1.25 lakh to dwelling residence |
| 5. | Complexity in Registering the Microfinance Company | Complicated as it requires approval of RBI | Relatively simple |
| 6. | Compliance Applicability | All compliance as it applies to an NBFC | They need to adhere to RBI rules and regulations |
| 7. | Number of Members | Minimum 2 in case of private limited & 7 in case of public limited | Minimum of 2 Person |
| 8. | Status of Organisation | With Profit Motive | No Profit Motive |
Process of Registration of Microfinance Company as NBFC
As there are two ways to start a Micro Finance Company, the process of setting up an NBFC or a Section 8 Company varies significantly. For setting up Microfinance as NBFC following are the steps wise process.
- Register a Company
The first step is to set up a Private Limited or Public Limited Company by filing a Spice Plus application with the ROC. We have a full-fledged service to assist you in incorporating a company in India.
- Ensure Capital Adequacy
The minimum of Rs/ 5 Crores is required as the net owned funds in the applicant company; hence the second step is to raise capital to more than Rs 5 Crore.
- Deposit the Capital
After the paid-up capital of more than 5 Crore is received in the company, the same should be converted as a fixed deposit in a scheduled bank and obtain a No Lien Certificate from the Banker.
- Apply for license
The last step is to make an online application to RBI with all certified documents as required. After that, the hard copy of the application needs to be submitted to the regional office of the RBI
List of Documents For MFI Registration as NBFC
| S.No | List of Documents |
| 1. | Memorandum of Association and Articles of Association |
| 2. | Certificate of Incorporation of the company |
| 3. | Certified True Copy of Board resolution |
| 4. | Auditor’s Certificate on Net Owned Fund |
| 5. | Banker’s Certificate of No Lien on Fixed Deposit |
| 6. | Banker’s report about the company |
| 7. | CIBIL Credit Report of the directors |
| 8. | CA Certifed Net worth certificate of the directors |
| 9. | Education Proof of the Director |
| 10. | Directors Professional Qualification Proof |
| 11. | Photo, Identity & Address Proof of Directors |
| 12. | Income Proof of the director |
| 13. | Relevant work experience in the financial sector |
| 14. | Organization Structure Plan |
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Section 8 Microfinance Company
Registration of the Section-8 Company with the MCA is the easiest way to start a Micro Finance Company in India, Without charging any guarantee or security It can give loans at low rates that are set by the RBI and the government. They help a lot with everything that happens in rural and agricultural areas, like making money and finding jobs. There are two types of microfinance companies that can be set up in India: one that needs to be approved by the RBI and one that doesn’t. The non-profit type is called a section 8 company and doesn’t need the RBI’s permission.
Though the RBI regulates the banking, However, through Master Circular RBI/2015-16/15 Dated 01 July 2015, the Section 8 Companies engaged in microfinance activities are exempted from the applicability of the RBI Act; thus they do not require any license from RBI provided they are engaged in following activities only.
Condition of Section 8 Micro Finance Company
| 1. | Provides loan not exceeding Rs. 50,000 for a business and Rs. 1,25,000 for meeting the cost of a dwelling unit to any poor person |
| 2. | The Company has received a Licensed under Section 8 of the Companies Act, 2013;` |
| 3. | The Company does not accept public deposits. |
Benefits of Section-8 Micro Finance Company
To make the availability of loans/credit to small businesses and borrowers, the Government of India and RBI have developed a policy framework for the Micro Finance Institutions (MFI). The policies are aimed to provide the required legitimacy and boost to the microfinance sector. Following are the key advantages of registering a Micro Finance Company in India.
- Easy access to funding
- Generates Employment
- Role in Rural Development
- Better Interest Rate of Repayment
- No Collateral/Security Lending
- Encourages Entrepreneurship
- No Minimum Capital Requirement
- Make people Self Sufficient
List of Documents for Section 8 Microfinance Company
| A. Documents of Directors/Shareholder | B. Documents For Registered Address |
| Passport Size Colour PhotographSelf attested Pan CardSelf attested Aadhar CardAddress Proof: (any one document)Telephone BillGas BillElectricity BillBank StatementIdentity Proof: (any one document)PassportVoter IDDriving License | Proof of PremisesTelephone BillElectricity BillWater BillNo Objection Certificate from OwnerDownload NOC Format |
Process of Registration of Section 8 Microfinance Company
- Digital Signature
For Registration of a Microfinance Company as a Section 8 Company, the applications to ROC are filed in digital format signed using the Digital Signature (DSC) of its promoters. Hence making the DSC is the first step.
- Check For Name Availability
The company’s name needs to be new and unique and is not the same or similar to an already existing company, LLP or Trademark. The application for name reservation is filed in the RUN form to ROC
- Drafting of MOA and AOA
The MOA contains the company’s main object; hence, the objects relating to the microfinance business are drafted as the company’s main object. AOA is the Internal rules of the company.
- Filing of Spice Plus Form to ROC
For the issue of the Certificate of Incorporation of Section 8 Microfinance Company, the application in Spice Plus form is made to ROC with required documents of promoters and relating to the registered address of the company.
- Issue of Certificate of Incorporation
On approval of the spice plus form as filed with the ROC, the certificate of incorporation is issued under the signature of the registrar of companies. It contains the name, registered address, date of incorporation, PAN and TAN Number.
Bar on Acceptance of Deposits as Micro Finance Company
A microfinance company can not accept deposits from the public and need to invest its funds for its operations. The bar on acceptance of deposits is applicable for both kinds of microfinance companies; in simple language, both the microfinance operating, whether as NBFC or as section 8 company, has a Bar on accepting the deposits. As per RBI Rules, the new microfinance companies operating as NBFC must apply as a Non-Deposit Taking company initially. After acquiring experience and track record, they may apply for a change in status from Non-Deposit to Deposit Taking Microfinance Company.
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