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  7. Section 8 Microfinance Company Registration - Process & Fees

Section 8 Microfinance Company Registration Process & Fees

Updated on: 26 Sep, 2024 11:16 AM

Getting a loan from the bank for a small business is a complex and tedious process that needs collateral before the loan gets approved. So many small businesses knock on the doors of microfinance companies to get a loan. Microfinance companies also encourage women entrepreneurs and provide assistance to start-ups. But how to register a microfinance company, and is it required to get approval from the RBI? Let’s drive you through the process of registering a microfinance company.

Contents

What is Section 8 Microfinance Company?

A Section 8 Microfinance company registered under the Indian Companies Act, 2013. With The objective is to provide financial aid to small business groups that are excluded from the formal banking system. Simply put, getting a loan from the bank is a tedious process. A Section 8 Microfinance Company can offer loans, insurance, and other products to its clients without requiring any collateral or security. The aim of a Section 8 Microfinance Company is to promote social welfare and economic development among the poor and marginalized sections of society.

What is Microfinance Loan?

  • A household with an annual income of up to 3,00,000 can get a microfinance loan without any collateral. A household is a single-family unit consisting of a married couple and their children (Unmarried).
  • Any loan that does not require collateral and is given to a low-income household, i.e., a household with an annual income of up to ₹ 3,00,000, regardless of how it is used or applied/ processed/ disbursed (through physical or digital means), is a microfinance loan.
  • The microfinance loan should not have any lien on the borrower’s deposit account to ensure that it is collateral-free.
  • The REs should have a policy approved by their board to allow the borrowers to repay the microfinance loan at flexible intervals according to their needs.

What are the features of a Section 8 Microfinance Company?

Some of the features of a Section 8 Microfinance Company are:

  • It is registered with the Registrar of Companies (ROC) as a non-profit organization under Section 8 of the Companies Act, 2013.
  • It does not need to obtain a license from the Reserve Bank of India to operate as a microfinance institution as long as it follows the RBI guidelines on microfinance lending.
  • It can charge interest rates of up to 26% p.a. On its loans, which is higher than the rates charged by banks and other regulated financial institutions.
  • It can sue the defaulter in case of non-payment of pending Loans.
  • It has to comply with the provisions of the Companies Act 2013 and file annual reports and returns with the ROC and the Ministry of Corporate Affairs (MCA).
  • It can also engage in other incidental or facilitative activities to its main objectives, such as education, health, sanitation, environment, etc.
  • There is no demographic barrier to Microfinance Company.
  • No minimum capital requirement.
  • It can lend unsecured loans.

What are the documents required for Section 8 Microfinance Company?

Documents required for Section 8 Microfinance Company:

  • Aadhaar card and PAN of both the directors
  • Recent bank statements of both directors.
  • Address proof documents
  • Passport size photos
  • Phone number and email address
  • Utility bills

What is the process of Section 8 Microfinance Company registration?

Obtain a DSC (Digital Signature Certificate) and DIN (Director Identification Number): The initial phase of company formation involves securing a DSC and DIN. The DSC is necessary for authorizing electronic forms. Both of these are essential for the incorporation of a Section 8 company.

Apply for Name Approval: Subsequently, the process entails submitting an application for name approval using Form INC-1. The chosen name should distinctly convey the company’s registration as a Section 8 company, incorporating terms like Sansha, Foundation, or Micro Credit.

Submission of Memorandum of Association (MOA) and Articles of Association (AOA): Following the approval of the selected name, the company is required to create the MOA and AOA and then file them alongside the required documentation.

File all Required Documents: The final step is to submit all the relevant documents, including the incorporation certificate and Form INC -12, to get a license.

What are Section 8 microfinance company registration fees?

The registration process for a Section 8 company in India involves various government fees, including those for obtaining a Digital Signature Certificate (DSC), Director Identification Number (DIN), name approval, and Certificate of Incorporation (COI). These fees can range from approximately INR 5,000 to INR 2+ lakhs and depend on the authorized capital of the company, which can start from one lakh to over a crore.

In addition to the government fees, there may be charges for drafting the Memorandum of Association (MOA) and Articles of Association (AOA), as well as for obtaining a Permanent Account Number (PAN) and Tax Account Number (TAN). These fees typically start from approximately INR 5,000.

Latest RBI Guidelines for Section 8 Microfinance Company

The latest guidelines from the Reserve Bank of India (RBI) for Section 8 microfinance companies include several key updates:

  • The central bank has implemented a monthly loan repayment cap of 50% of the household's monthly income to prevent excessive lending to customers. For example, if the household income is ₹3 lakh per year, the maximum monthly loan installment cannot exceed ₹12,500. Additionally, the RBI has eliminated prepayment penalties on microfinance loans, allowing borrowers to repay their loans early without incurring additional charges.
  • Microfinance lenders are required to disclose their interest rates and other charges clearly to borrowers.
  • A microfinance loan is now defined as a collateral-free loan given to a household with an annual income of up to ₹3,00,000.
  • The loan amount for customers covered by Section 8 microfinance companies can be expanded up to ₹2,40,000.
  • Interest rates and other charges on microfinance loans should not be excessively high. These loans will be subject to supervisory inspection by the RBI.
  • The RBI has set a common household income limit of ₹3,00,000 for loans to qualify as microfinance, removing the earlier distinction between rural and urban areas.
  • For entities to qualify for an NBFC-MFI license, they should have at least 75% of their assets in microfinance.

These guidelines aim to strengthen the microfinance sector by ensuring fair practices and protecting the interests of low-income borrowers.

Frequently Asked Questions

Q- Can Section 8 company lend money?

A Section 8 Company is a convenient option for setting up a Micro Finance Company in India, as per the MCA (Ministry of Corporate Affairs). It does not require any extra fees or security deposits. It can offer loans at low interest rates, as suggested by the RBI and the central government.

Q- Which is better trust or Section 8 company?

Forming a trust takes 10-15 days, while forming a Section 8 Company can take 60-75 days. Trusts have much lower costs than companies under section 8 of the company’s act.

Q- Does Section 8 company have shares?

A company with charitable objectives can be formed as a Section 8 company under the Companies Act 2013. Such a company can either have a limited share capital or a limited guarantee (with or without share capital).

Q- What is the drawback of Section 8 company?

Section 8 companies are not allowed to distribute profits to their members, and they may face more instability than other types of companies. These are some of the common drawbacks of forming a company with charitable purposes under Section 8 of the Companies Act, 2013. However, these companies also enjoy some tax benefits.

Q- What is the difference between a Section 8 company and NGO?

A company with charitable purposes can be incorporated as a Section 8 Company under the Companies Act 2013. This type of company can get funding from the government and other sources. On the other hand, an NGO is an organization that works for a social cause, usually charitable. A Section 8 Company differs from an NGO in that it aims to promote commerce, science, art, charity, religion, or any other useful object for society’s benefit.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.