India is currently one of the largest emerging markets for small finance companies or micro-finance institutions.
A large part of our population lives in villages and rural areas where traditional banking support is unavailable. People with lower incomes use informal financial help, such as moneylenders and pawnbrokers. This usually means paying high-interest rates and being in debt forever. Those debtors cannot help economically.
By this time, the government has understood the importance of small finance companies for overall development and employment generation in countries like India. The government has made provisions for small finance banks.
What is a small finance company?
The main purpose of A financial company is to offer loans to private and business customers. In the same way, the Small Finance Company satisfies the financial needs of individuals and companies at a smaller level. They cater to the poor who do not have access to regular banking and financial services. So you can conclude that small finance companies act like a poor man’s bank. If you have your priorities straight, starting a small finance business in India may not be a daunting task.
Your customers may be small and marginal enterprises/farmers/communities belonging to unorganized sectors. They are generally not served by other major banks. The reasons for taking out a loan can be different for each customer.
These small finance companies have to obtain a license from the Reserve Bank of India. After that, they can provide three basic services that are :
Initially, the amount of loan provided by them is less than ₹50,000. But these banks provide loans without demanding any collateral or marginal money. Also, they charge a very less interest rate than the moneylenders.
What is the Role of small finance companies in the Indian context?
Small finance companies provide better access to capital & funds to the communities. Therefore, they assist in all developmental goals by providing several financial services, programs, and resources.
- To Strengthen the participation of women in income-generating activities and decision-making at the household and community level.
- To ensure the Availability of health insurance and protection.
- To reduce financial needs to protect children from child labor.
- Ensure to provide more environment-friendly agricultural inputs.
- To educate the public about better resource management so that the sustainability of income-generating activities and natural resources can be improved.
- To increase the livelihood opportunities of the poor and create opportunities for self-employment.
- Educate rural people in simple skills to make better use of available resources.
How to establish small finance companies in India?
Starting any business requires a deep understanding of the customer’s needs. In addition, you must have a solid business plan that outlines the path to success. You must also have a step-by-step guide to start and make your microfinance business in India a success. To do this, the first requirement is to comply with strict regulations and meet initial funding requirements. Before starting a financial bank, you need to decide whether you want to designate your financial institution as a for-profit institution or a nonprofit institution.
Starting nonprofit small finance companies :
A financial institution belonging to a nonprofit organization is registered as a foundation/association/business association following the relevant laws. These are, respectively, the Indian Trust Act 1882/Societies Registration Act 1860/Companies Act 2013. Microcredit, often called microcredit, must comply with Section 8 of the Companies Registration Act 2013.
You can set up a microfinance NGO registered as an association, trust, or company in India. Another name for a nonprofit organization registered as a trade association is section 8 company. Such Section 8 firms are more credible among ministries, donors, and other stakeholders. Therefore, this is the recommended way for your microfinance business. Listed below are some of the benefits and conveniences associated with a Section 8 corporation.
Registration under Section 8 of the Companies Act is very cheap and easy; RBI approval is not mandatory. All that is required is to follow their interest and processing fee guidelines. The number of requirements required is much less compared to other financial institutions. There is no minimum fundraising limit, and unsecured loans up to Rs. 50,000 for small businesses. The loan limit for flats and apartments is Rs. 1,25,000, The loan can be given as per the instructions of the respective departments, and the average interest rate should not be more than 26%.
The processing fee cannot exceed 1% of the gross amount of the loan. For insurance, the premium charged must be the actual cost of the group/life/health insurance and nothing extra. Public deposits may not be accepted.
- Directors or shareholders need to submit a Xerox PAN Card, Adhaar Card, and Address Proof (Utility Bill, Bank Statement, Rent Agreement, etc.).
- Registered company has to include Ownership Proof (Utility Bill etc.) and NOC as address proof.
Starting a profit-making finance company:
A nonprofit financial institution can be registered either as a non-banking financial company (NBFC) or as a cooperative society. Alternatively, an unregulated nonprofit organization can also be converted into a regulated for-profit organization.
That commercialization of the unit attracted investors to the market. The supervisory and regulatory authority is RBI, where they are registered. Their performance and other standards must be maintained and, if possible, improved to ensure a good investment for investors. Today’s large financial institutions began as nonprofits. For example, India’s two largest, Swayam Krishi Sangam (SKS) and Spandana Microfinance, both from Hyderabad, also started as nonprofit organizations. They later became for-profit financial companies. Remember, investors want to make sure their investments get higher returns.
- At least one manager or company must have at least ten years of experience in the financial sector.
- Small Finance Companies like NBFC can use the Self Help Group (SHG) to mediate financial transactions.
- Financial institutions are NBFCs that do not take deposits. NBFC license is applied for by RBI in terms of fund capital.
- The paid-up capital of an NBFC-MFI must be Rs. 5 Cr. It must be a member of the Credit Information Companies (CIC). In addition, it must be a member of at least one self-regulatory organization (RBI, SEBI, IRDA, NABARD, or SIDBI, to name a few).
- A small finance company to register as an NBFC should have a CIBIL membership.
- No loan can be given to any borrower exceeding Rs. 50,000 on the first loan. All subsequent loans are capped at Rs. 1 lakh. However, an individual borrower cannot have loans exceeding Rs. 1 lakh at a time.
- Loans are provided to borrowers whose annual income is less than Rs. 1 lakh (for rural areas) or Rs. 1,60,000 (for urban areas).
- The interest charged is (a) [cost of finance 12% margin] or (b) [average base rate x 2.75], whichever is lower. At least 10% of the total assets of a small finance company must be loans.
- Stakeholder’s/director’s KYC and income proof
- Director’s educational or professional qualification proof as well as the proof of work experience in the field of the financial sector.
- Director’s or stakeholder’s net worth certificate
- Director’s Latest credit report.
- MOA & AOA provided by the NBFC depicting the Financial/Investment/Lending business.
- Company incorporation certificate
- Bank statement of No Lien supporting Net Owned Funds (NOF) of Rs 5 Cr.
- Detailed plan and ideation
Steps to follow:
Register the company
To start a new finance business, the first step is to register your financial bank as a company. Initially, you can register your finance company as a private limited company or a limited liability company in India. Only after registering your company legally will you be able to continue with further procedures.
To open a financial bank, it is necessary to arrange or raise your capital first. As to the minimum capital and paid-up capital, Rs. 5 Cr is mandatory for NBFC registration. So you must arrange a NOF withdrawal for at least this amount when you register the company. Only after showing and ensuring your capital can you get permission to start a small finance company.
Certificate of no Lien
If no charges are collected from the property within the required period, a “Nil encumbrance certificate” will be issued. This means that no lender placed a lien on the property during this period. Deposit Rs. 5 Cr deposit and get a no-lien certificate from the bank.
Register with RBI
Submit an online application to RBI to set up an NBFC as a small finance company in India. This application must be submitted together with other required documents. After successfully submitting your application, your company will receive a Company Application Reference Number (CAR Number). This CAR number must be used in all subsequent communications with RBI.
Filing with RBI
It is a must for all small finance companies to get registered with the Reserve Bank of India. To reserve with RBI, you have to clear all the above steps. After going through all the above procedures, you are required to submit a copy of the application along with all the necessary documents to be sent to the Regional Office of the Reserve Bank of India.
As a large percentage of people in India rely on small finance companies to start their small businesses or arrange for their good livelihood, it becomes important to get aware of the procedures to start these companies as they are emerging as good businesses in the future. With automated systems now available, the growth of the microfinance sector has accelerated. Automation has increased efficiency. The microfinance sector must focus on understanding the needs of the poor. They must actively find better ways to deliver services according to demands. Establishing a small finance business in India would require developing an efficient and effective mechanism to provide credit to the poor.