A Finance Company is set up with the basic purpose of providing loans to individual and commercial customers. Similarly, a Small Finance company fulfil the financial needs of individuals and businesses, on a smaller level. Basically, they serve those poor people who cannot access mainstream banking and financial services. Thus, you can deduce that a Small Finance Company acts as a bank for the poor. If your priorities are clear, the process of how to start your Small Finance Company in India may not be a daunting task.
Your customers may include small and marginal businesses/farmers/entities belonging to the unorganized sectors. In general, they don't get served by other larger banks. The reasons for taking the loan may be different for each of your customer.
As of now, India is one of the largest emerging markets for Small Finance Companies or Micro-Finance Institutions (MFI). With a huge part of our population based in villages and rural areas, where the traditional banking assistance is out of reach. People in the lower income group take the informal channel of financial assistance like moneylenders and pawnbrokers. Generally, this means paying high-interest rates and be forever under debt. Such debtors are not able to benefit from the economic development of the country.
In such areas, the Small Finance Banks prove to be useful. After obtaining a license from the Reserve Bank of India, they can provide three basic services i.e. savings, credit and insurance. Primarily, the amount of loans is less than Rs. 50,000. Such entities provide loans without demanding any collateral or marginal money. Moreover, the borrowers get much easier repayment facilities. And these Small Financing Entities, although charging higher interest rates than those in the urban areas, still charge much less as compared to the private moneylenders.
The government has realized the importance of such entities for the development of rural and backward sectors. In recognition of the same, RBI has released detailed guidelines related to how to start a Small Finance Company, applicable in India.
With MFIs, the communities have better access to capital and funds. Thereby, MFIs assist in all of the development goals through various financial services, programs, and resources.
Starting any business requires an in-depth knowledge of the needs of the customer. Additionally, you need to have a solid business plan in place outlining the path to success. Likewise, you need to have a step-by-step process for how to start and make your Small Finance Company, success in India. For this, the first prerequisite is to comply with the strict regulations and meet initial funding requirements.
Before setting up your Finance Bank, you need to decide whether you want to set your MFI as a Profit Institution or as a Non-Profit Institution.
An MFI under Non-Profit Organization is registered as Trusts/Societies/Companies under the relevant acts. Those are Indian Trust Acts 1882/Societies Registration Act 1860/Companies Act 2013, respectively. Micro-Finance, generally termed as Micro-Credit, need to take Section 8 Company Registration of Companies Act 2013.
A Profit Making MFI can be registered either as a Non-Banking Financial Company (NBFC) or as a Co-operative Society. Incidentally, an unregulated Non-Profit NGO can be transformed into a regulated, For-Profit Institution, as well.
This commercializing the entity would attract market investors. The supervising and regulatory authority is RBI, where they are registered. Their performance and other standards need to be maintained and, if possible, improved, to assure good investment for the investors.
In fact, today’s big MFIs started as Non-Profit Entities. For instance, India’s two largest, Swayam Krishi Sangam (SKS) and Spandana Microfinance, both of Hyderabad, also started as Non-Profits. Later they turned into For-Profit Finance Companies.
Just remember, investors would want to ensure that their investments earn higher returns.
You can start Small Finance NGO registered as a Society, Trust or a Company, in India. Another name for NGO registered as a Company is Section 8 Company.
Such Section 8 Companies have higher credibility amongst Government departments, Donors, and another stakeholder. Therefore, it is an advisable path to your Small Finance Business. Listed below are some of the benefits and ease of doing business as a Section 8 Company:
⇒ Directors/Shareholders are to submit Copies of PAN Card, Adhaar Card, Address Proof (Utility Bill, Bank Statement, Rent Agreement etc.).
⇒ Address proof for the Registered office of the Company would include Ownership Proof (Utility Bill etc.), NOC.
To start your Finance Company as a Section 8 Company, the minimum number of Directors is 2, in India.
An NBFC-MFI is allowed to provide the Micro-Loans only to a special type of clients/borrowers. Other essential features are:
⇒ Director's/Shareholder's KYC and income proof
⇒ Director's Education/Professional qualification proof, along with proof of the work experience in the field of the financial services sector.
⇒ Net-Worth Certificate of the Directors, Shareholders and the Company.
⇒ Latest Credit Report of the Directors and the Shareholders.
⇒ MOA & AOA of the NBFC depicting the Financial/Investment/Lending business.
⇒ Company Incorporation Certificate.
⇒ Obtain a Banker's Certificate of No Lien supporting Net Owned Funds (NOF) of Rs 5 Cr.
⇒ Banker's Report about the Company and its group.
⇒ A detailed action plan about the Loan Products, Fair Practice Code, Credit and Risk Assessment Policy.
⇒ Organization's Structure Plan.
⇒ Decision-making process for Approval or Rejection of a Loan Application.
⇒ Board Resolution passed in favour of NBFC formation.
With Automated systems now available, the growth rate of the Micro-Credit Sector has accelerated. Automation has worked to improve efficiency. The Sector providing Micro-Finance has to focus on understanding the needs of the poor. They need to proactively devise better ways of delivering services in line with the requirements. To start a Small Finance Company in India would involve developing an efficient and effective mechanism to deliver credit to the poor.
This article has been shared by Reema, in recruitment with LegalRaasta. We are in the business of providing well-informed Legal, Registration and Financial Services related to Professions and Companies.