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The microfinance segment in India has proved to be fundamental for promoting financial inclusion by extending credit to low-income groups that are traditionally not catered to by lending institutions. The essential features of microfinance loans are that they are of small amounts, with short tenures
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FAQ :
A microfinance loan is a small amount loan with a short tenure, typically provided without collateral, and with more frequent repayments than traditional loans. These are generally used for income-generating activities but can also be for consumption or housing.
The main players in the microfinance industry include scheduled commercial banks, small finance banks, co-operative banks, NBFCs offering microfinance loans, and NBFC-MFIs (Non-Banking Financial Companies-Micro Finance Institutions).
A microfinance company can be registered in two primary ways: as a Non-Banking Finance Company (NBFC) registered with the RBI, or as a Section 8 company under the Companies Act 2013.
An NBFC-MFI needs to meet a Net Owned Fund (NOF) requirement, currently Rs. 5 crore (with a glide path to Rs. 10 crore by March 31, 2027), and satisfy the principal business criteria where financial assets constitute more than 50% of total assets and income from financial assets is more than 50% of gross income.
Yes, registering as a Section 8 company is generally simpler as it does not require direct RBI approval, is easier to operate, and involves less stringent compliances compared to registering as an NBFC.
Microfinance companies must adhere to compliances such as having a board-approved policy on loan pricing and repayment, submitting information to Credit Information Companies (CICs), displaying a Fair Practice Code, implementing a due diligence process for recovery agents, and having a mechanism for borrower grievances.
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