Note on Micro Finance Companies

A) WHAT IS MICRO FINANCE COMPANY?

A microfinance company is basically a type of financial institution which provides small-scale financial services in the form of loan, credit or savings. These companies are introduced to ease the credit system for small businesses as they don’t get a loan from banks due to their complex process. Therefore, it is commonly named as a Micro-credit organization.

They offer small loans to various small businesses or households that do not have access to formal banking channels or are not eligible for loans. They provide small loans amounting-

The simplest way to register a Micro Finance Company in India is to register a Section-8 Company with MCA (Ministry of Corporate Affairs), without the charge of any kind of marginal money or guarantee security.

A microfinance company can give loans at inexpensive rates directed by the RBI and central government. They provide huge support to all the rural and agricultural development including the creation of both income and employment. There are basically 2 types of microfinance companies that are allowed in India, the former type has to be registered with the RBI and the latter is the non-profit type, which is registered as a section 8 company and does not need RBI approval.

B) SOME IMPORTANT FEATURES OF MICROFINANCE –

1. Microfinance do not require any collateral
   The keystone feature of the microloans under microfinance is that it does not require any collateral. The borrowers are not.
2. The borrowers are generally poor people
   The purpose of microfinance is to lend a helpful hand towards needy people. So generally, the borrowers of microfinance are the people belonging to underdeveloped part of India and Small businessmen or entrepreneurs.
3. The money which can be availed under microfinance are usually the small amount. For instance, Microloans.
   The money given in the form of microloans under microfinance to the poor section of the society and small businessman are usually in a small amount ranging in between 20,000 – 30,000rs in India.
4. The loan tenure is short
   The tenure of the loan is really short as the amount given in the form of microfinance is too small. The borrowers have to repay the amount the of loan in the prescribed time period given by the banks. If it is not bound to pledge anything as a security for the repayment of the loans. They need not worry about the assets that are required to be kept in banks for security purpose.
5. The purpose of microfinance loans is to generate income
   As it is well known that microfinance loans are only given to low-income group people and small businessmen. So, the main focus of microfinance loans is to generate income for the poor people of undeveloped part of India so they can work smoothly.

C) IMPORTANCE OF MICROFINANCE IN INDIA –

Its importance has been amplified amidst global financial crisis when trust into formal banking system is shaken.

Microfinance in India plays a major role in the development of India.

1. It acts as an anti-poverty vaccine for the people living in rural areas.
2. It aims at assisting communities of the economically excluded to achieve greater level of asset creation and income security at the household and community level.
3. The utmost significance of microfinance in India is that it dispenses the access to the capital to small entrepreneurs.
   As it has been discussed above that microfinance in India is providing loans, insurance, access to savings accounts.
4. Credit is important to the poor people for maintaining the common imbalance in between the income and their expenditure.
5. It is also vital to the poor people for the income generating activities like investing in marginal farms and other small scale self-employment ventures.
6. Their access to formal banking channels is low due to the lack of resources a nature of formal credit institutions.
7. Consequently, in India, Microfinance institutions and self-help groups are leading to other traditional banking channels as they are catering the need of credit to poor people.
8. It has contributed a lot in enhancing the quality of life of the poor people.

Therefore, microfinance is not a financial system but a tool to alleviate poverty from the country and bring social change and specially to uplift the status of women in our country so they can become self-reliance. There is a public interest the interest of microfinance and this is what makes it acceptable as valid goal for public policy.

D) MICROFINANCE COMPANIES IN INDIA –

1. Some of the microfinance companies that offer loans to the unbanked and under banked population in India as are follows:
2. Arohan financial banks
3. BSS microfinance private limited
4. Cashpor microcredit
5. Equitas microfinance private limited
6. Asirvad microfinance private limited
7. Bandhan financial services private limited
8. Disha microfin private limited
9. Annapurna microfinance private limited
10. Esaf microfinance and investments private limited
11. Fusion microfinance private limited

E) WHY TO REGISTER FOR MICROFINANCE COMPANY?

Some of the working mechanisms of a micro-finance companies are as follow:

1. Promoting socio-economic growth: At the community level, the microfinance company will promote both socio and economic growth. Also, empowering self-help groups along with facilitating sustainable development by them. A variety of other financial services will be required by the poor and not just loans; hence, it is a powerful tool to eliminate the poverty factor.
2. No RBI Approval: No long procedures and easy to register as there is no RBI approval required when you register as a non-profit company. Even, there is no need for minimum capital of Rs.2 Crores.
3. Provide a way to funding: It gives a better overall loan repayment rate than traditional banking products. Further, which will help in meeting credit needs for such a population range.
4. Offers reasonable services for small businesses: It focuses on building a financial system for the poor and unemployed and aims to make permanent local financial institutions that try to attract domestic deposits, recycle them into loans, and give other financial services.
5. Minimum Compliances: Company is expected to comply with RBI standards even if it is not required to register with the reserve bank. But no approval from RBI is needed. A Section 8 company will comply with Companies Act the same way as other companies do.

F) MANDATORY COMPLIANCES FOR MICRO FINANCE COMPANY –

There are minimum compliances which are to be met by the Micro Finance Company. However, the most important compliances are as follows:

1. RBI Compliance: The company is expected to comply with the RBI norms even if it is not required to register with it.
2. Company Act: A Section 8 company is also required to comply with the Companies Act 2013, in the same way, other companies do.
3. Additional: There are other laws as well which are to be taken care of like PMLA etc and other mandatory compliances are also to be met with.