Overview: Section 8 Microfinance Company Registration

If you’re considering starting a finance business in India without needing RBI approval and capital restrictions, Section 8 Microfinance Company Registration is the perfect solution. It enables you to establish an organization focused on helping underprivileged communities reduce poverty through accessible microfinance services. Section 8 Microfinance companies are exempt from acquiring an RBI license according to the master circular (RBI/2015-16/15 DNBR (PD) CC.No.052/03.10.119/2015-16) dated July 01, 2015.

Microfinance in India allows for the provision of unsecured loans, including personal loans, group loans, and household loans, with interest rates capped at 26% per annum in compliance with RBI norms. By choosing Section 8 Microfinance Company Registration, you can create a unique pathway for organizations dedicated to social welfare. Understanding the registration process in detail is crucial if you want to establish such a company.

Why Choose Section 8 for Microfinance?

Opting for Section 8 Microfinance Company Registration offers several distinct advantages, including:

  • Non-Profit Structure: Profits are reinvested into the company’s social objectives, ensuring ethical lending practices.
  • Tax Benefits: Exemption from income tax allows organizations to maximize their social impact.
  • Simplified Compliance: Compared to other forms of financial institutions, the regulations surrounding Section 8 Microfinance Company Registration are less cumbersome.
  • Exemption from RBI License: Companies registered under Section 8 are exempt from obtaining an RBI license until their asset size exceeds Rs. 100 Crore.
  • Compliance with RBI Guidelines: Familiarizing yourself with RBI regulations for microfinance is essential for operations.
  • No Minimum Capital Requirement: This provides greater flexibility for entrepreneurs starting in the microfinance sector.

How to Register a Section 8 Microfinance Company?

To initiate the Section 8 Microfinance Company Registration, you must file your application with the Ministry of Corporate Affairs (MCA). The process involves submitting the necessary documents and obtaining a Certificate of Incorporation. No additional RBI license is required for the company as long as it stays below the asset size threshold.

Steps for the Section 8 Microfinance Company Registration:

  1. Digital Signature Certificate (DSC) and Director Identification Number (DIN): Essential for e-filing by all directors.
  2. Name Approval: Submit Form INC-1 for a name that reflects your focus on microfinance.
  3. Memorandum of Association (MoA) and Articles of Association (AoA): These critical documents outline the company’s social objectives.
  4. Incorporation: Complete e-Form INC-32 alongside the MoA, AoA, and supporting documents.
  5. PAN and TAN Registration: Necessary for tax compliance.
  6. Bank Account Opening: Choose a bank that understands the requirements of Section 8 Microfinance Companies.

Documents & Details Required for Section 8 Microfinance Company Registration

To complete your Section 8 Microfinance Company Registration, you will need:

  1. Director’s Identity and Address Proof: This includes PAN cards, Aadhar cards, and other identity documents for at least two directors.
  2. Registered Office Address Proof: Recent utility bills, rental agreements, and a No Objection Certificate (NOC) from the property owner.
  3. Main Object for MOA: Clearly defined microfinance objectives.
  4. Shareholding Pattern: Descriptions of member shares in percentage.
  5. Authorized & Paid-Up Capital: Calculated based on your business plan.

Loan Limits Under Section 8 Microfinance for Households

Households falling within the annual income bracket of up to Rs. 3,00,000 can avail microfinance loans without the burden of providing collateral. This approach eliminates barriers, ensuring that financial assistance is accessible to those who need it most. 

Firstly, loan shall be given to those households, whose annual income is not exceeded from Rs. 3,00,000.

Secondly, loan limit is to be set according to the repayment capacity of a household, means monthly loan EMI can-not be exceeded from the 50% of the monthly household income.

Consequently, if a family has a loan obligation more than 50% of the monthly income, then new loan can-not be given to that family, until they paid off the existing loan obligations because they don’t have any repayment capacity.

Let’s say a company called “Micro help” giving a loan to a family who earns Rs. 20,000 per month (that means annual household income is Rs. 2,40,000 (less than Rs. 3,00,000), Microhelp won’t give them loans with monthly repayments totaling more than Rs. 10,000 (half of Rs. 20,000) and if it is for 12 months the total loan value will be Rs. 1,20,000.

Now, if a family already has loans where they are paying Rs. 12,000 per month in EMIs, those loans will continue until they are paid off. However, Microhelp won’t give them any new loans until their repayments are brought within the 50% limit, ensuring responsible lending practices.

Household Definition: For the purpose of microfinance eligibility, a household is defined as a single family unit, comprising a married couple and their children (unmarried). This definition establishes a clear framework for determining the beneficiaries who qualify for microfinance loans.

Board Policy: If any section 8 microfinance company registration wants to provide loan to its customers less than 50% of the monthly income, it has to set its own policy approved by its board of directors.

Data Reporting and Compliance: The microfinance institutions/other NBFCs/ Banks must regularly provide accurate data to Credit Information Companies (CICs) and use this data to ensure that borrowers are not taking on too much debt. The microfinance companies can also check information from borrowers themselves, their bank statements, and local inquiries to verify compliance with the debt limit.

Features of Section 8 Microfinance Company Registration

Section 8 Microfinance Company Registration gives the following advantages with the exemption of license from RBI under section 45 of RBI Act,1934:

  1. Non-Profit Registration: Registered under Section 8 of the Companies Act, 2013, with the Registrar of Companies (ROC), a Section 8 Microfinance Company Registration operates as a non-profit organization. This unique status positions it as a socially driven entity dedicated to community welfare.
  2. Exemption from RBI License: Unlike traditional microfinance institutions, a Section 8 Microfinance Company Registration can operate its finance business without getting a license from the Reserve Bank of India (RBI). It aligns with RBI guidelines on microfinance lending, streamlining operational processes.
  3. Flexible Interest Rates: Empowering financial flexibility, a Section 8 Microfinance Company Registration can charge interest rates of up to 26% p.a. on its loans. This rate surpasses those offered by conventional banks and regulated financial institutions, providing a competitive edge.
  4. Legal Actions for Non-Payment: In the event of non-payment of pending loans, a Section 8 Microfinance Company has the legal authority to sue defaulters. This capability ensures a robust mechanism for addressing non-payment issues.
  5. Compliance with Companies Act 2013: Committed to transparency and accountability, a Section 8 Microfinance Company adheres to the provisions of the Companies Act, 2013. This includes the regular filing of annual reports and returns with both the ROC and the Ministry of Corporate Affairs (MCA).
  6. Diverse Activities Beyond Microfinance: Beyond its core objectives, a Section 8 Microfinance Company can engage in various incidental or facilitative activities in addition to microfinance. These may include initiatives related to education, health, sanitation, environment, and more, broadening its impact on community development.
  7. National Presence: Breaking down barriers, there are no area restrictions for a Section 8 Microfinance Company. It is open to serving a diverse range of individuals and communities, promoting financial inclusivity with its various numerous branches as well.
  8. No Minimum Capital Requirement: A Section 8 Microfinance Company Registration is not bound by a minimum capital requirement like NBFCs-MFI. This adaptability allows for a more responsive approach to community needs.
  9. Unsecured Lending: Section 8 Companies completes the financial needs of underserved communities, such companies has the capability to lend unsecured loans. This feature enhances accessibility for borrowers without the burden of collateral requirements. 

Cost of Section 8 Microfinance Company Registration

You can commence your Section 8 Microfinance Company Registration journey for just ₹1,20,000! This fee covers all necessary registration costs. Be cautious of offers that seem significantly lower, as they may indicate potential fraud or inadequate service quality.

Is Section 8 Microfinance Company Registration possible even after the MCA Circular of Non- Registration? 

Yes, Section 8 Microfinance Company Registration is still possible even after the MCA Circular on Non-Registration. Despite the MCA Circular, our services guarantee a hassle-free registration for your Microfinance Company. Our legal advisors are ready to guide you through the process, ensuring the best deal for your registration. We specialize in navigating the complexities post the MCA Circular, offering expert assistance. Don’t hesitate; our team is well-equipped to handle the registration with efficiency and expertise.

Understanding Codes for Section 8 Microfinance Company Registration

When any Company Register with MCA, it registers under a specific activity code. If a Parle-G is registered under food making categories, so it have a specific activity code under its 21-digit CIN. Therefore all banks and NBFCs in India are registers under activity code which is related to finance activity, that is 64 (earlier it was 65).

The Code 88 is nothing but related to social activities, which means companies registered under this activity code are doing the social activities.

Therefore, a Section 8 Microfinance Company Registration is also a not-for-profit company (for social activities) and such companies gives loans to poor people to reduce poverty in India. So code 88 can be possible with the object of Microfinance activities under Memorandum of Association (MOA).

Additionally, if your section 8 company is registered with Microfinance object and with activity code 64, so it will be more good because you are registered under main finance activity code and moreover, anyone can describe that you are a microfinance company, in a first glance.

CIBIL under Section 8 Microfinance Company Registration

Basically, there are four prominent companies in India that generate & provides credit information for individuals and for companies.

  1. CIBIL (TransUnion CIBIL)
  2. CRIF High Mark
  3. Experian
  4. Equifax

Mostly people think about CIBIL is a credit score, so its not a credit score but it is one of the company that provides credit information (credit score) about people and businesses to financial institutions (Banks/ NBFCs/ MFIs) as same like TransUnion CIBIL, other three companies (CRIF, Experian & Equifax) do same work.

Under Section 8 Microfinance Company Registration, TransUnion CIBIL is not providing its membership due to its overburdened workload and due to not having license from RBI like NBFCs and Banks even after knowing well about exemption from license from RBI.

But rest three companies (CRIF, Experian & Equifax) are properly giving its memberships, for downloading the data of new customers and updating the list of defaulting loans. 

So, Section 8 Microfinance companies shouldn’t worry about the credit membership because excluding CIBIL, all credit companies are available to empanel you.

Is Donation allowed under Section 8 Microfinance Companies?

Yes, Section 8 Microfinance is registered under Section 8 of the Companies Act,2013 and this section is specially related to not-for-profit means for social objects. Therefore, this company has the power to get donations, as donations are allowed under it, but if, you are getting donations and lending money from such donations, that wouldn’t be a streamlined process, because donations are for social purposes, and without the motive of profit but under microfinance you charge interest from customers from loan. Therefore, raising funds in the form of donations & others, especially when you are doing core microfinance activities, is not advisable.

Additionally, you can raise funds under Section 8 Microfinance Company Registration, in the form of donations, when you spend such full amount in social activities other than loans.

Can a Section 8 Microfinance avail Auto-Debit facility for recovery of loan EMIs?

Yes, a Section 8 Microfinance Company Registration like other Banks and NBFCs can avail the auto-debit facility to recover its EMIs without physically going at the customer’s place. This facility saves time and agent costs and helps to run the business smoothly.

The company has to apply to its bank where the bank account of the company is opened to avail the auto-debit facility and adopt the procedure as demanded by the bank.

Can I Charge a Processing Fee on the Loan under Section 8 Microfinance?

Yes, microfinance institutions can charge a processing fee when they give out loans. Usually, this fee is about 1% of the loan amount. So, if someone borrows ₹100, the institution might charge a fee of ₹1.

This small fee helps cover the costs of managing the loan, allowing the institution to keep operating and helping more people. It’s important that borrowers know about this fee before they agree to the loan, so there are no surprises.

Even though 1% is a common fee, the exact amount can change based on local rules or the policies of the institution. It’s important for both the lender and the borrower to understand the fees involved.

Frequently Asked Questions (FAQs)

  1. Can a Section 8 microfinance company affect the credit score of its defaulting customers? Yes, Section 8 microfinance companies have the authority to update the credit scores of their customers by obtaining membership from Credit Information Companies.
  2. How does a Section 8 microfinance company address challenges such as loan defaults? These companies often implement robust risk management strategies and engage closely with borrowers to minimize potential defaults.
  3. What is the governance structure of a Section 8 microfinance company? The governance structure typically consists of a board of directors responsible for overseeing the organization’s activities and ensuring compliance with regulations governing non-profit entities.
  4. Can a Section 8 microfinance company operate in multiple states or regions? Yes, Section 8 microfinance companies can operate across multiple states, promoting financial inclusion and social development in diverse areas.
  5. Is software mandatory to operate the entire loan management under the company? Yes, software is crucial for disbursing, calculating, reporting, and updating data efficiently, which cannot be handled manually every time.
  6. How does a Section 8 microfinance company withdraw profit? Section 8 microfinance companies cannot withdraw profit as they do not have the authority to issue dividends to shareholders. The only means of earning is through interest on loans.
  7. Can a microfinance company provide digital loans to its customers? Yes, Section 8 Microfinance Companies can offer loans both physically and digitally.
  8. Can a Section 8 microfinance company provide secured loans? No, Section 8 microfinance companies are restricted to providing only unsecured loans, meaning loans must be collateral-free.
  9. Can individuals from urban areas avail services from a Section 8 microfinance company? Yes, Section 8 microfinance companies typically extend their services to both rural and urban populations, ensuring financial inclusion for diverse individuals.
  10. How is a Section 8 microfinance company funded? Section 8 microfinance companies primarily receive funding from their directors and shareholders, allowing for investment in community projects.
  11. Who can benefit from the services provided by a Section 8 microfinance company? Services target the economically marginalized sections of society, including women and rural communities, to provide financial assistance and empowerment.
  12. How does a Section 8 microfinance company differ from a traditional microfinance institution? Unlike traditional microfinance institutions that aim for profit, a Section 8 Microfinance Company operates as a non-profit entity, prioritizing social impact over financial returns.
  13. What is a Section 8 Microfinance Company? A Section 8 Microfinance Company is a non-profit organization registered under Section 8 of the Companies Act, focused on providing financial services to the economically disadvantaged, aiming for social welfare rather than profit.

Conclusion

Section 8 Microfinance Company Registration is the best option to those who are seeking a legal finance business with a valid legal license. It provides a compelling opportunity for entrepreneurs to deliver impactful financial services that foster economic empowerment in underserved communities. By thoroughly understanding the registration process, operational compliance, and the features unique to these organizations, you can successfully establish a socially responsible microfinance institution. This initiative not only strengthens community development but also plays a vital role in poverty alleviation across India. If you are ready to make a meaningful difference, start your Section 8 Microfinance Company Registration today!

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