Are you looking for a business opportunity that is long-lasting and profitable? Starting a microfinance business can be the best bet. Why? It is simple–the demand for credit across low-income earners and unbanked populations is rising like never before. It means you do not have to look for potential customers to grant loans with a massive marketing budget. Microfinance is one of the key pillars of the Indian financial system, and its dominance in India is second to none.
If you are looking at how to start a microfinance company in India, it is the right time to press the pedal. However, the road to opening a microfinance company is not easy in India due to the rigorous RBI regulations. But, worry not! This write-up will provide a layman’s overview of everything you need to know about this popular venture. So, let’s get started.
Understanding the Microfinance Landscape
A microfinance business is a boon for the unbanked population and those with minimal collateral options. They grant loans, insurance, and savings options. Legally, in India, MFIs can operate as one of the following.
A: Non-Banking Financial Company – Microfinance Institutions (NBFC-MFIs)
B: Section 8 Companies (Non-Profit)
C: Cooperatives and Societies
If scalability is on your card, the NBFC-MFI structure is definitely a standout option.
Step-by-Step Guide: How to Start a Microfinance Business in India?
Here’s the breakdown of the process about how to start a microfinance business in India:
Choose the Structure
The first step in how to start a microfinance business in India is deciding on your structure. The two most popular options for this include.
- NBFC-MFI: This is a non-banking company that falls under the RBI’s regime. These companies must have atleast 75% of its assets as “qualifying assets”, which essentially means a loaning capital (i.e., loans either ready for disbursal or already granted). Although they require a high capital investment, they excel in scalability and profitability.
- Section 8 Company: These entities are social-based, i.e., with a non-profit objective. They typically serve a confined group of low-income earners with an aim to provide financial assistance. Unlike NFBC-MFIs, these companies do not require high capital infusion.
Register a Company With the Ministry of Corporate Affairs (MCA)
The next essential step is to register a company, for which you will need:
- A minimum of two directors for a Private Limited company (three for Public).
- Digital Signature Certificates (DSC) and Director Identification Numbers (DIN).
- An approved unique name that reflects the financial nature of the business.
Raising the Minimum Net Owned Fund (NOF)
If you opt for the NFBC route, the capital requirement is one of the significant challenge. The Minimum Net Owned Fund (NOF) for staring an NBFC-MFI is set at ₹10 Crore. Remember this threshold can vary region-wise. Make sure the deposit this amount as a Fixed Deposit in a designated bank account before you rush to the RBI[1] approval.
Applying for the RBI License
This is the most critical phase of how to start a microfinance company in India. You must submit an online application on the RBI’s “COSMOS” portal, alongside documents cited in the next section.
Essential Documentation Checklist For Registering the NBFC-MFI
To streamline your journey on how to start a microfinance company in India, ensure you have the following ready:
Required Documents for NBFC-MFI Registration
| Category | Specific Document / Requirement |
| Common Company Documents | • Certified copies of Certificate of Incorporation . • Certificate of Commencement of Business (for public limited companies) . • Certified extract of the Main Object Clause in the MOA relating to financial business . • Audited Balance Sheet and P&L Account (with directors’ and auditors’ reports) for the last 3 years or period of existence. |
| Director & Management Information | • Educational Certificates (highest professional qualification) for all directors • Experience Certificates in the Financial Services or Banking Sector for all directors .• Bankers’ Reports for the company, group entities, subsidiaries, and directors with substantial interests . |
| apital & Compliance Proofs | • Fixed Deposit Receipt and Banker’s Certificate of “no lien” in support of the Net Owned Fund (NOF). • Board Resolution: Confirming no NBFC activity is being carried out currently. • Board Resolution: Stating the company and group entities have not and will not accept public deposits • Board Resolution: Confirming the formulation of a Fair Practices Code as per RBI guidelines. |
| MFI-Specific Requirements | • Board Resolution: Commitment to join all Credit Information Companies and at least one SRO. • Board Resolution: Adherence to RBI regulations on pricing of credit, fair lending, and non-coercive recovery • Board Resolution: Establishment of internal exposure limits to prevent geographical concentration. • Board Resolution: Confirming the company is not licensed under Section 8 of the Companies Act. • Roadmap: A technical plan for achieving 85% qualifying assets. |
Operational Requirements and Compliance
Starting the microfinance company may be easy for a compliance wizard, but the real challenge lies in keeping it up and running. Here are a few things you must keep in mind:
- Whatever amount of loan your company grants must be collateral-free.
- Your services should be accessible to households with an annual income not exceeding ₹3 Lakh.
- Your MFI must provide a flexible repayment schedule based on the borrower’s choice.
- You must maintain a transparent pricing policy and follow the Fair Practices Code (FPC)
- You must avoid taking security deposits or margins from borrowers.
Conclusion
Learning how to start a microfinance company in India is a journey of careful legal planning that can go awry; when it does, rejection is the only outcome. That’s why it is recommended to partner with a seasoned consultant who can guide you through compliance ripples and myriad paperwork for effortless business setup. If you need such a partner, Adviosu won’t disappoint.
Adviosu is not just a top-rated consultant for RBI licensing; it is a reliable ally on your compliance journey. Whether you are starting or want to meet operational norms, Advisou has your back. With years of experience and a team of seasoned professionals, we promise an effortless company setup in one go. Contact us now to book a free consultation.
Also Read: How to Start a Gold Loan Business in India
FAQs
1. Can an existing Section 8 Company convert into an NBFC-MFI?
Yes, a Section 8 company can transition into an NBFC-MFI, but it is a complex process. The entity must first increase its Net Owned Fund (NOF) to meet the RBI’s current threshold (currently ₹10 Crore). Once the capital is secured, the company must apply to the RBI for a fresh Certificate of Registration (CoR) as an NBFC. During this transition, the company must ensure its “qualifying assets” meet the 75% criteria and that its objectives in the MoA are updated to reflect commercial lending.
2. What is the “Fit and Proper” criteria for Directors?
The RBI mandates that directors of a microfinance company must possess a clean track record. The “Fit and Proper” criteria include:
- Professional Qualifications: Expertise in finance, banking, or social work.
- Integrity: No criminal record or adverse findings by any regulatory body (SEBI, IRDA, etc.).
- Financial Soundness: Directors must not be willful defaulters.
- Conflict of Interest: They should not hold a directorship in another NBFC-MFI that could create a conflict.
3. Is there a limit on the number of MFIs a single borrower can borrow from?
To prevent over-indebtedness, the RBI guidelines stipulate that a borrower cannot have loans from more than three MFIs at any given time. As a new company, you are legally required to verify the borrower’s current outstanding debt through Credit Information Companies (CICs) like CIBIL or Equifax before sanctioning a new loan.
4. Are foreign investments (FDI) allowed in Indian Microfinance companies?
Yes, 100% Foreign Direct Investment (FDI) is permitted in NBFCs via the automatic route, provided the minimum capitalization norms are met. However, if the MFI is registered as a Section 8 (Non-Profit) company and wishes to receive foreign funds for its operations, it must obtain registration under the Foreign Contribution (Regulation) Act (FCRA) from the Ministry of Home Affairs.
5. What are the “Scale-Based Regulations” (SBR) applicable to MFIs?
The RBI classifies NBFCs into four layers: Base, Middle, Upper, and Top. Most new microfinance companies start in the Base Layer (NBFC-BL). As your asset size grows, typically beyond ₹1,000 Crore, the company may move to the Middle Layer, which triggers more stringent compliance requirements regarding capital adequacy, internal audits, and corporate governance disclosures.
