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Initiating a Small Finance Company: Everything You Wish to Know!

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Introduction

Our country India is one of the prominent developing nations that carries the potential to spurt growth. Despite such development and progress being made we have to be wary of the fact that the majority of the population still resides in rural areas where inaccessibility to banking services looms over.

There is still a difficulty in obtaining the credit that is secure and reliable, therefore businesses and other individuals look elsewhere for fetching it mainly constituting the financial sources that are informal in nature. They are all caught in this vicious circle where these financial sources overcharge them.

To address this issue, NBFCs and small finance companies are coming to the rescue in bridging the gap. They serve the needs of the lower-income groups that are in urgent need of credit.
Read Our Service: Process to Apply for NBFC Registration in India

Knowing About Small Finance Company

Small finance company which is also known as a microfinance institution is nothing but a private entity that deals in providing the services related to finance especially to the businesses that belong to lower income levels.

Highlighting on the fact that many individuals fail to fulfill the criterion set out by the conventional banking system like having a background related to credit or the existence of a major chunk of income, it becomes highly difficult for sustaining their needs with the help of credit.

The small finance companies are very much aware of such situations and ease on the requirements of its customers by extending the credit for both personal and professional needs.

Now the will of being an entrepreneur is no more a distant dream since micro finance companies take good care of their financial needs.

Small Finance Company: Maximum Cap of Lending

As mandated by notification under RBI, a small finance company is eligible to only lend an amount of Rs. 50k in the rural areas and on the other hand the cap is set to Rs one lakh twenty-five thousand confined to urban areas and can be made to the individuals or businesses that fall under lower income groups.

The cherry on the cake is that the loan is provided without the need of marginal money or any form of collateral security.

A small finance company must ensure that it extends loan that are reasonably priced with a simultaneous acknowledgement of the RBI regulations.

Read Our Blog: How to Start a Finance Company in India? 

Small Finance Company: Benefits

A micro finance company comes packed with a lot of benefits, some of them are as follows:

  1. It is more like a messiah of the lower-income group’s individuals that assist them with quality credit.
  2. It encourages the development of an entrepreneur's driven society and promotes the values of becoming economically self-reliant.
  3. Small financial company doesn't bother about the credit history of the customer and doesn't back off in the times of credit appraisal.
  4. In contrast with the conventional banking mechanism, these microfinance institutions adopt more flexible rates at which the loan can be repaid.
  5. It triggers the promotion of better living standards and in turn, leads to growth of the economy.

Small Finance Company: Options

There exists broadly two paths to initiate a small finance company, which are as follows:

  1. The first one talks about being registered with RBI that includes getting the title of a Non-banking finance company or popularly called as NBFC.
  2. The second option is to fetch registration under the provision of section 8 of the companies Act, 2013.

Micro Finance Institution: How to Initiate

Microfinance institutions can be understood to mean entities that are involved in the business of providing loans and share similarities to the prototype of the NBFCs.

These institutions encompass the target customers who are usually weaker in economic holdings or are marginalized in some way.

On a general basis these institutions lend an amount ranging from 20k to 30k to fulfill the financial requirements of the entities.
Read Our Blog: Micro Finance Institution - You Shall Know Before Start It!

An NBFC MFI can be construed to mean an NBFC that entails non-deposit-taking. For such a company to exist it is a mandatory norm that eighty-five percent of its assets must be qualified in a way. To be called an NBFC- MFI there are some conditions that come along with it which are enumerated as follows:

  1. NBFC- MFI can help in providing loans to the households that showcase an income of Rs one lakh annually especially in the rural areas and on the other hand in the urban areas it is confined to Rs one lakh sixty thousand.
  2. In the very first cycle, the loans to be provided are confined to Rs 50K and in the subsequent cycles it is restricted to one lakh.
  3. In the event the loan is amounting to exceed Rs 15K, the minimum period for which the loan could be extended is capped at 24 hours.
  4. It is indeed appreciable that the loans do not entail the giving out of collateral by these small finance companies.
  5. Loans can be repaid weekly, monthly or can be based on 15 day payment. The borrower is endowed with the option in choosing an EMI cycle.
  6. With regards to the processing fee, it is limited to being one percent of the gross loan amount.
  7. It is a mandatory requirement for it to have membership of CIBIL.

Starting Small Finance Company: Procedure in Detail

To be able to start NBFC-MFI, the enumerated process must be kept in mind:

  • Registering the business: The first and the foremost step involves registering the company under the provisions of the companies Act, 2013. Once the formalities with respect to registering the company is done forthwith, it must hold capital on a minimum basis as required by RBI.
  • Requirement of capital: There has to be a minimum capital of Rs five crores in order to initiate a small finance company. In contrast in northeastern states, it is capped at Rs 2 crores. Along with it a bank account must be opened by the business and the capital must be submitted in the fixed deposit form.
  • Filing application with RBI: The very next steps require the business to get registered under RBI by filing an application.

Starting small finance company: Required documents

  1. Requirement of certificate of incorporation
  2. Copy of MOA
  3. Copy of AOA
  4. Copy of the resolution of Board permitting the company to be registered as microfinance company.
  5. Requirement of declaration that exhibits the company's resolve to following rules and regulations laid down by RBI.
  6. Five-year business plan of the company that talks about its projections with respect to financing etc.

Conclusion

In the nutshell, it can be concluded that the emergence of the small finance companies have paved a path to easier accessibility of loans in India, especially for the lower-income groups.

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Author
Vinay Singh
Vinay Thakur is Managing Partner in Corpseed. He focused on payments, digital transformation, and financial technology for over 15 years and holds strong expertise on fintech startups, banking innovation, and investors with a keen understanding of the trends and activities of startups, banks, and investors in the space.