The New Guidelines of RBI on Section 8 Microfinance Companies

Microfinance companies are small-scale financial institutions that provide loans, credit, or deposits. These organisations were formed to streamline the credit system for small businesses that are unable to acquire a loan from banks due to the lengthy process. As a result, it is commonly known as a Micro-credit, Micro-benefit Company. They give small loans to a range of small businesses and individuals who may not have access to traditional banking channels or loan eligibility.

Microfinance Companies

Microfinance corporations, as the name suggests, are financial organisations that give funds to low-income groups where the need for funds is lower than in other sectors of society. Traditional financial organisations, such as banks & other financial institutions, are often unavailable to these industries. 

They provide small loans of less than Rs.50,000 in rural areas and Rs.1,25 000 in urban areas. According to the Ministry of Corporate Affairs, the Section-8 Company is the simplest way to establish a Microfinance Company in India. Without charging any extra costs or assuring security. It can make low-interest loans, as the RBI and the government advised. They contribute significantly to all rural and agricultural development elements, including income generation and employment creation. Read more

Requirements for Section 8 Microfinance Companies

Many entities, such as banks, provide loans to enterprises in India. So, why do we requiremicrofinance companies? The requirement arises because it provides the following functions:

• It gives financial help to businesses that are unable to provide collateral.
• It promotes female entrepreneurship.
• It offers much-needed assistance to entrepreneurs.
• It provides support even for little sums, which are often funded by hand loans.
• It formalises the loan process, bringing about discipline in low-income borrowing. This eliminates overborrowing and the issues that might arise from large future obligations.

Microfinance Companies’ Formation

According to the Reserve Bank of India, only a Non-Banking Finance Company (NBFC) should perform financial transactions. However, the RBI grants some firms exemptions to conduct financial operations up to a set limit.

As a result, a microfinance company can be formed in one of two ways:

• Non-Banking Finance Companies (NBFC) that have been officially registered with the RBI
• Section 8 businesses (companies formed under Section 8 company registration 2013).

Section 8 Microfinance Companies' Goals

The following are the primary objectives of Microfinance Company:

• First, to provide low-income people with the chance to become self-sufficient.
• Provide financial services for pennies on the dollar.
• To provide financial assistance to those who work in various jobs such as transportation, fishing, carpentry, etc.
• Offer financial assistance to small firms that cannot afford collateral.
• Increase women's participation in earning a living.
• Make excellent healthcare accessible.
• Increase and diversify low-income people's income sources while simultaneously giving opportunities for self-employment.

Section 8 Microfinance Companies Working

The following are examples of how Section 8 Microfinance Companies operate:

• A microfinance Company is a banking service given to unemployed or low-income individuals or organisations who would not otherwise have access to financial services.
• It helps customers to secure appropriate small business loans while adhering to ethical lending norms.
• Microfinanciers, like regular lenders, charge interest on loans and enforce strict payback terms.
• People seeking help from microfinance organisations may be required first to pass an introductory money-management course.
• Lessons include understanding interest rates, cash flow, the operation of financing agreements and savings accounts, budgeting, and debt management.

Latest RBI Guidelines for Section 8 Microfinance Companies

The Reserve Bank of India (RBI) declared new regulations governing Section 8 microfinance companies lending on March 14.

Among other revisions, the RBI has redefined microfinance as a collateral-free loan to a household with a yearly income of up to rupees three lakhs. This new definition allows microfinance institutions (MFIs) to broaden their scope in terms of borrowers.

However, there is a growing dispute over how this new law will affect the sector. While some claim that this would help the business grow, others believe that the greater income cap will compromise the basic meaning of microfinance, which is primarily lending to small borrowers.

According to industry analysts, these new restrictions are expected to change the client base and attract more borrowers from metropolitan areas and from a variety of other micro, small, and medium firms (MSMEs).

Major Focus Points After the RBI Declarations

From Group Borrowing to Individuals

Traditionally, microfinance lending has primarily targeted women from rural regions who belong to joint liability groups (JLGs) and self-help organisations, with the goal of providing loans to individuals who do not have access to official financial institutions such as banks. However, as a result of these new restrictions, the client base will increasingly widen and move.

Focus on Urban Clients

According to current data from the industry association Microfinance Institutions Network, the sector includes almost 78 per cent rural portfolios and 22 per cent urban portfolios. However, experts believe that the new framework will also bridge that gap and make microfinance more accessible to people in urban areas. According to experts, the amount of financial deprivation is higher among the urban poor; thus, some MFIs may progressively shift their attention to them. At the same time, there are some gaps that must be filled when various other loans are bundled under the banner of microfinance loans.

According to the revised standards, the borrower section needs to be clarified. Now, if a loan is issued to any individual from class IV employees with less than Rs 25,000 in monthly salary, it is termed a microfinance loan; however, it was not intended to be. It can be sold to banks in order to obtain priority sector advantages.

The Effect of Revised RBI Guidelines on Section 8 Microfinance Companies

The revised definition of microfinance loans for 'not-for-profit' companies registered u/s 8 of the Companies Act, now includes collateral-free loans to households with an annual household income of up to INR 3,00,000, provided that the monthly loan obligations of a household do not exceed 50% of the monthly household income.

According to the interpretation of the new RBI guidelines, the loan amount to customers covered by section 8 microfinance companies can be expanded up to INR 2,40,000/-. Interest rates & other charges/fees on microfinance loans should not be overly high. They will be subjected to a supervisory inspection by the Reserve Bank. The lender also stated that each borrower would receive one loan card with all loan data such as loan amount, interest rate, processing expenses, penalty, etc.

If a Section 8 microfinance company’s assets exceed 100 crores, the company must seek conversion to an NBFC-MFI within three months. It will not be necessary to convert the non-profit organisation into a profit organisation. In summary, the RBI supports microfinance while simultaneously being concerned about Section 8 Microfinance enterprises, the most known example being "Casper Micro Credit."

The RBI has authorised Section 8 microfinance enterprises to provide microfinance or loans to the underprivileged in order to help them improve their lives. It was a fresh paradigm with a lot of potentials, and very supportive of its evolution.

Conclusion

When we form a microfinance company through an NBFC, we must have faith in microfinance. Though there are challenges, these may be overcome by creating one's own market. According to the RBI, companies that do not meet the NBFC-MFI standards must submit a board-approved plan with a roadmap to satisfy the prescribed rules, together with an application for registration. In addition, the central bank deregulated NBFC-MFI lending rates to align them with all other microfinance lenders.