When you wish to start out a finance business to helping poor people and having in trouble stepping into RBI License, the one and only alternative is to form a section 8 microfinance company(earlier it was registered under section 25 of old companies act,1956)
Section 8 microfinance company is actually the financial institution that provides small-scale financial services within the type of loan, credit, or savings. These companies are introduced to ease the system for small businesses as they don't get a loan from banks because of their complex process. Therefore, it's commonly named a Microcredit, a Micro-benefit organization. They supply small loans to varied small businesses or households that do not have access to formal banking channels or eligibility for loans.
Section 8 Microfinance Company provides small loans that are Rs. 50,000 for rural areas and for urban it's Rs. 1,25,000.
The simplest because to register a Microfinance Company in India is to register the Section 8 companies with MCa( Ministry of Corporate Affairs) without charging any marginal money or guarantee security. It can give loans at inexpensive rates directed by the RBI and central government without the ired of RBI Approval. They're huge support to all or any or rural and agricultural development including income and employment creation.
There are basically 2 kinds of microfinance companies that are allowed in India, one is which possesses to be registered with the RBI and another is that the non-profit type, which is registered as section 8 microfinance company that doesn't need RBI approval.
Main Features of Section 8 Microfinance Company:
1. RBI approval isn't required
2. No need for minimum capital of Rs. 2 Crores.
3. Minimum Compliances.
4.Can provide unsecured loans to small businesses of Rs. 50,000.
5. Can grant a loan for dwelling residence up to Rs. 1.25 lakh.
6. Section 8 company got to follow the RBI guidelines on the of interest and processing charges.
7. It is a legal finance business and you will sue the defaulter just in case of non-payment of the amount.
8. In India, finance vocations are authorized only to Non- Banking Finance Companies (NBFC) and governed by RBI. NBFCs are required to urge registration with RBI and comply with RBI guidelines. However, some business forms are given an exemption by the Reserve Bank of India(RBI) to undertake to finance activities up to a specific extent.
9. The Reserve Bank of India through its master circular RBI/2016/15 DNBR (PD)CC.No.052/03.10.119/2015-16 Dated 01 July 2015 has exempted all section 8 Companies engaged in microfinance activites.
10. As per Para 2(iii). Section 45-IA, 45/IB,and 45-IC of Reserve Bank of India Act, 1934 shall not apply to any non-banking financial vocation which is engaged in the below-mentioned activities.
a) Engaged in Micro-financing activities, providing credit not exceeding Rs. 50,000 for a business enterprise and Rs. 1,25,000 for meeting the worth of a dwelling unit to any poor person for enabling him to spice up his level of income and standard of living ; and
b) Licnensed under Section 8 of the Companies Act, 2013 ; and
c) Not accepting public deposits as defined in paragraph 2(1)(xii) of Notification No. 118/DG(SPT)-98 dated January31,1998.
Benefits of Section 8 Microfinance Company:
The government of India and therefore the Reserve Bank of India have created a conducive policy framework for microfinance institutions(MFIs) to supply necessary legitimacy and impetus to the world. The Subsequent is the advantage of Micro Finance Business.
a) provide access to funding
b) Encourage self-sufficiency and entrepreneurship
c) It offers a far better overall loan payment rate than traditional banking products.
d) Help in meeting credit needs for such a population range from emergency loans, consumer loans, commercial loans, capital loans, housing, etc.
Loan limits by section 8 Micro–Finance Company:
A borrower with a rural household annual income not
exceeding Rs. 1,00,000 or urban and
semi-urban household income not exceeding Rs.
1,60,000 are getting to be eligible.
• Loan the amount won't exceed Rs. 60,000 within
the primary cycle and Rs. 1,00,000 in subsequent
• The total indebtedness of the borrower won't
exceed Rs. 1,00,000.
• Tenure of the loan to not be but 24 months for
loan amount in additional than Rs. 30,000
with prepayment without penalty.
• Loan to be extended without collateral.
• Aggregate amount of loans, given for income
generation, isn't but 50 percent of
the total loans are given by the MFIs.
• Loan is repayable on weekly, fortnightly, or
monthly installments at the choice of the
Documents for Section 8 company registration:
KYC (Know your Client) of director: In this we need Basic information like Name, Photo,
Aadhar card, PAN Card, email id, mobile number.
Company Name Name of the company that needed for name approval.
Normally we suggest two names of the company for name approval.
Office Address: In this, we need an address where the company
officially established. If office at rented property than rent paper. If the
office address at self-owned then property paper needed. And also needed
the electricity bill for the last two months.
• All documents submitted must be valid.
What are the compliances to be complied with after
starting the loan business under the NBFCs?
Section 8 Company Shall suits the next
compliances every year:
1. ROC Filings like Annual Returns, Balance Sheets,
Profit and Loss Accounts, etc.;
2. Maintenance of proper accounts;
3. Appointment of Statutory Auditor;
4. tax Returns and GST Returns;
5. Preparation of monetary Statements & get
1. What is the Interest Rate on Loan Amount?
Section 8 Micro Finance is abided by the Reserve
bank of India even it has been exempted from RBI License and hence for the
Interest rate, it has to follow the RBI Guidelines from time to time. Presently
the Interest rate is Maximum 26% P.A on reducing balance method or flat rate as
decided by the mutual agreement.
2. Is Income Tax is levied in Section 8 Microfinance?
Income tax is a tax, which is levied on Income or
profit, the section 8 company is a nonprofit making company and it cannot earn
profits, however we can use the word “Surplus” in lieu of “profit” and the Net
Surplus (after deducting all the expenditures) is Chargeable to tax at the
specified rate of Income Tax but if you have 80G and 12A License, you can get a
benefit of up to 100% deduction of tax.
3. Sources of Funds for Section 8 Micro Finance Company
to distribute the loans?
section 8 Micro Finance company can raise funds to
distribute the loans or to use for other social activities from the various
sources. Some of them are as follows:
Subscriptions from Members
Donation from Members or outsiders
Lifetime Membership Fee
Tenure-able Membership Fee
FDI (Foreign Direct Investments)
Loan from Banks
Income from other social activities.
4. Can a Personal Loan be provided by Section 8
Yes, as we discussed above, section 8 microfinance
can provide the unsecured loans without collateral and personal loans also come
under the ambit of unsecured loans.
5. Is a section 8 Micro Finance Company eligible to do
Micro Finance business, as it is NGO?
Yes, as we discussed above, section 8 microfinance
company is registered under the Companies Act, 2013 and having a valid license
and certificate and also works under the guidelines of RBI even it is exempted
from license from RBI. The motive to exempt the RBI license to section 8
Companies for helping the poor people through the social
6. Can we use this NGO for helping people in health
&education or other social activities?
Yes, but for this, you have to well draft the
Memorandum (Bye-Laws) of the Company. It all is possible. Don’t worry VAKIL
KARO expert will help you surely with all the process.
7. Process to Register Section 8 Micro Finance
Obtaining Digital Signature Certificate (DSC) and
Directors Identification Number (DIN)
Filing of Form INC-1 for Reservation of Name
After the approval of INC-1, File form INC-12 to
registrar for a license under sub section
(1) of section 8. Registrar will issue a license in
Form INC-16 Filing of forms and documents with registrar for incorporation
(This is same as in case of public company limited by shares) Issuance of
certificate of incorporation by registrar To Register the Company estimated
time is 15-30 days.