How to Start a Small Finance Company in India?
India is a developing market with favorable circumstances for business and investment. Its diverse financial industry continues to expand at a rapid pace, providing a plethora of prospects and intriguing job options. This industry is growing at a rate of roughly 8.5 percent per year, showing that the economy is solid.
Now is an excellent opportunity to start your own finance company and break into this rapidly expanding field. When opposed to the banking system, Indian finance companies allow for more innovation and diversification, so take advantage of this. All you need is a solid company plan and a well-thought-out marketing strategy to succeed.
What is a Small Finance Company in India?
A small finance company, sometimes known as a microfinance institution, is a private organization that provides financial services to low-income enterprises and individuals. Small finance organizations give financing to people and businesses at the bottom of the income scale.
Many people and businesses are unable to meet the requirements of traditional banking institutions, which include good credit history and a large amount of disposable income. Micro or tiny finance companies offer their consumers financial resources to meet their personal or professional financial needs. Individuals, self-employed professionals, and corporations can use a small-size loan from a microfinance organization to realize their entrepreneurial dreams or meet a personal financial emergency.
Options for Start A Small Finance Company in India
In India, there are two ways to launch a small financial company:
● The RBI registered Micro Finance Institutions (MFIs) and Non-Banking Finance Companies (NBFCs).
● Section 8 of the Companies Act of 2013 used to register a micro finance company.
Non-Banking Financial Company- Micro Finance Institution (NBFC-MFI)
How to Start a Non-Banking Financial Company- Micro Finance Institution (NBFC-MFI) Company
1. Business Registration
The first step in establishing a small financial firm is to incorporate the firm under the Companies Act of 2013. After the company registration processes are completed and the business receives its Certificate of Incorporation from the State ROC, it is required by the RBI to have a minimum amount of capital.
2. Capital Requirement
A minimum capital of INR 5 crores is required to launch a microfinance enterprise in India. In the North-Eastern states, however, a minimum investment of INR 2 crores is required to launch a small financial company. The company must open a bank account and deposit the funds in the form of a fixed deposit.
3. RBI Application
The next step is to submit an application for NBFC-MFI registration to the Reserve Bank of India in the prescribed format, together with the required documentation. A Company Application Reference Number is issued by the RBI, after which a physical (hard) copy of the documents is submitted.
The RBI conducts thorough due diligence on the applicant company’s documentation, including the incorporation certificate, banker’s certificate, MOA and AOA, fixed deposit receipt, and so on. The bank issues a Certificate of Incorporation if the applicant passes the RBI’s checklist. The company can begin lending in India after acquiring the RBI’s incorporation certificate.
Documents Required for Small Finance Company Registration
● Certified copy of the certificate of incorporation and the certificate of company start-up.
● Certified copy of the company’s most recent Memorandum and Articles of Association.
● Certified copy of the Board Resolution authorizing the company’s registration as a small/microfinance firm.
● Declaration stating that the company should follow the Reserve Bank of India’s laws, regulations, and notifications for non-banking financial enterprises in India.
● The bankers’ report showing the company’s dealings.
● The application meeting the minimum capital requirements, according to the auditor’s report.
● A detailed 5-year business plan outlining the company’s operational strategy as well as financial estimates.
● Certified copies of all directors’ educational and professional qualifications, as well as experience certificates in the Financial Services sector, if applicable.
Micro Finance Company
How to Start a Micro Finance Company?
1. Minimum Requirements
To form a Section 8 corporation, at least two people must be involved.
2. DSC and DIN
For application filing and compliance requirements, each company director must have a Digital Signature Certificate (DSC) and a Directors Identification Number (DIN).
3. Naming the Section 8 Company
The application for the company’s name approval must be filed, and it must include a distinctive name for the company. The phrases foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust, or Micro Credit must be included in the name of Section 8 small financial firm. The nature of the business becomes visible to the wider public as a result of this.
4. Central Government License
The company must next get a license to operate as a Section 8 company once the name has been approved. The license is obtained when the company’s thorough documentation is submitted.
5. Company Incorporation
The company incorporation application must be filed after the documents are submitted and the government approval is acquired. The firm incorporation certificate is issued after the documents and application have been approved.
6. PAN and TAN
Once the firm has been incorporated, the PAN and TAN must be obtained.
Documents Required for Section 8 Small Finance Company Registration
● All directors and promoters must have current passport-size pictures.
● All directors and promoters should have a copy of their PAN.
● Directors’ identity proof includes voter ID cards, driver’s licenses, passports, and Aadhar cards.
● Address Proof of the directors’ identity, such as a bank statement or the most recent utility bills, such as a phone, landline, or power bill.
● Rent agreement or lease deed, property paperwork, or electricity bills, for example, are property ownership documents of the Registered office.
● A certificate from a Chartered Accountant or a Company Secretary in good standing.
While it is easier to start and maintain a small finance company as a Section 8 corporation, the most experienced finance professionals advise that launching a small finance company as an NBFC-MFI. Starting an NBFC-MFI gives the business the RBI’s blessing to conduct its lending activities safely in the country.
Furthermore, with the RBI’s support, the possibilities of default are lower than with Section 8 companies. Because registering an NBFC-MFI necessitates the presence of a banker on the board, lending activities are carried out and supported by subject matter specialists. Starting a small finance firm in the form of an NBFC-MFI is possible if the company has the right support and guidance from business experts with prior experience registering NBFCs with the RBI.