Micro finance is the source of financial services for small businesses and entrepreneurs. This comes under NBFC (Non-Banking Financial Company) and micro credit finance business to small business and individuals. In India, there are two kinds of business models that are involved in micro finance activities such as :
Non profit NGOs like Society, Trust and Section 8 companies
Profit making institutions like NBFC
Before beginning operations, they need to possess a minimum worth recommended by the authority.
Incorporation of microfinance companies must be done according to the Companies Act 2013 or 1956.
Important permit or license must be acquired.
They contribute low amount of finance to deprived individual of society
Microfinance Institutions are such NBFC who do not take deposit and they are not licensed under section 8 according to the Companies Act, 2013. This executes banking at a small level like a bank can do. MFIs are smaller compared to NBFCs.
Generally, a micro finance company can impose three types of charges. Let us have a look at them :
Processing Charge –
Processing charge should not exceed 1% of the gross loan amount
The Interest Charge -
The average rate of interest should not be exceeded by 26%
The Insurance Premium –
Actual cost of Insurance for group, health, life and others is to be charged. According to RBI policy, no extra is permitted.
There are a number of compliances that are required to be complied by the Micro Finance Company. Let us focus on some of the most essential compliances :
Company Act
Section 8 company requires satisfying the Companies Act like any other company.
RBI Compliance
Company must fulfil RBI norms even if this is not registered with the reserve bank.
Other
There are other laws that are given importance also like PMLA (Prevention of Money Laundering Act, 2002) and others.
| Advantages of Micro Finance Company | Disadvantages of Micro Finance Company |
| No need to be approved by RBI | RBI guidelines should be followed strictly |
| There is no minimum capital of 5 crore | Deposits cannot be accepted |
| Can charge up to 26% rate of interest | There is not any gold loan type scheme |
| Simplest way for starting finance business | Profits cannot be taken from the company |
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Microfinance refers to an array of reasonable financial services that aim low-income clients, either on or below the poverty line, mainly women. It aims to allow these clients by offering them access to microcredit for income-generating actions, savings and insurance, and remittance services.
A Microfinance Institution (MFI) is a company that offers microfinance services like microcredit and insurance services aimed for the poor. All Microfinance Institutions share the common features of offering these services to clients who are not included in formal financial services.
Financial inclusion or inclusive financing includes offering financial services at reasonable costs to disadvantaged and low-income households in society who cannot get formal financial services.
Microfinance clients are either below or above the poverty line that have no access to financial services from financial organizations like banks. They may live in either rural or urban areas but unable to use banking features caused by improper documents or inadequate collateral security.
Since rural women are prone to discrimination, microfinance targets to develop their status within the family and community by offering them access to financial services. Women getting microfinance activities be likely to be more aggressive, confident, possess more assets and play an important role for decision-making.
The rate of interest imposed on the loan by microfinance industry differs from each other.
At the end of 2018 to 2019, microfinance industry in India had a total of 3.17 crore clients with a gross loan portfolio of 68,207 crores. The industry has grown by 47% over the past year.
Clients are required to satisfy the following criteria to get a loan:
Total indebtedness of the clients should not be more than 1,00,000
Client should not borrow from more than 1 other Micro Finance Institution
Client must have an income generating action
Client must have documents like ID and address proof
Client should possess a bank account
Microfinance Institutions in India are governed by the Reserve Bank of India with its master circulars relating to NBFC-MFIs. Depending on the RBI Circular No: DNBS (PD) CC No: 395/03. 10. 38/2014-15
Interest rate of MFIs is likely to be more than loans from traditional banks as small loans are likely to be more costly to process as compared to bigger ones (as provided by traditional banks). Furthermore, MFIs loans are free of security and need a more hands-on and time-intensive evaluation to verify the credit worth of a prospective client. Microfinance clients are likely to live in remote areas and since MFIs travel to clients, there is also an enhanced cost of operations which is also revealed in the interest rate for MFI loans
Concerns about negative consequences of too much interest rates, violent lending procedures and higher indebtedness and high multiple lending among poor borrowers have led to the attention offered to liable financial customs and growing Client Protection Principles. The three main aspects of these are as follows:
Customer Protection, Regulation and Supervision to make sure customers are treated appropriately and that they understand the assumption of their actions
Develop standards and codes of conduct with a stress on reliability
Financial Literacy education to grow the knowledge of clients so that they can become more accountable for their own financial wellbeing
