MFI

MICROFINANCE INSTITUTION

In India, MFI is not a new concept in the financial market. The government of India gives special attention to the development of rural credit due to the poverty in India. In India, the Microfinance industry has witnessed a tremendous growth in the last two decades.

Microfinance institutions are those type of financial institutions which provide loans and other financial services to poor sections of the society. Generally, they operate in rural areas and among the low-income group by extending small loans.

The Reserve Bank of India has extended its regulation and supervision to those Microfinance Institutions which qualify certain criteria. The main objective of the RBI is to make such MFIs healthy and stable.

Microfinance Institutions which are regulated by RBI and register themselves with RBI by fulfilling the accompanying conditions are called NBFC-MFIs or Non-Banking Financial Company-Microfinance Institutions.

Here are the following conditions for NBFC – MFIs.

  • NBFC-MFI is a non-deposit taking NBFC, with Minimum Net Owned Funds of Rs.5 crore (for NBFC-MFIs registered in the North Eastern Region of the country, it will be Rs. 2 crores)
  • *“qualifying assets” of not less than 85% of its net assets.

Qualifying assets are loans which are provided by the NBFCs which fulfill the certain specifications such as:

  1. The loan must be given without any collateral.
  2. NBFC-MFI can give loans to borrowers 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.
  3. The total indebtedness of the borrower does not exceed Rs.1, 00,000. While arriving at the total indebtedness of a borrower, loans availed towards meeting education and medical expenses shall be excluded.

Apart from the aggregate amount of loans extended for other purposes such as housing repairs, education, medical and other emergencies, the minimum fifty percent of loan should be given for productive purposes.

NBFC-MFI is allowed to charge a differential rate of interest to its customers however variance for individual loans cannot exceed 4 percent between the minimum and maximum interest rate. NBFC-MFI is not allowed to levy the prepayment penalty.

A customer should be aware of the components of loan pricing. NBFC-MFI can levy only following charges mentioned below:

  1. Interest Charge
  2. Processing Charge
  3. Insurance Premium (Including administrative charges in respect thereof).

Due to the heavy RBI compliances, there are many entities or business houses finds it difficult to obtain NBFC license for this now they are opting an indirect route to acquire NBFC through purchasing existing NBFC license of such entity which is not operational. This way is considered as one of the most efficient & less costly ways to obtain NBFC License.

Takeover process requires prior approval of the Reserve Bank of India whereas minor changes in the management or control are outside the purview of the approval but in case of significant changes, prior approval of RBI is required to be obtained.

In the following circumstances, prior approval of Reserve Bank of India is required:

  • The takeover of NBFC or acquisition of control, which may or may not results in the change in management.
  • Variation in the shareholding of an NBFC, which is resulting in 26% acquisition or transfer of the paid-up capital including progressive increases over the period of time.
  • Change in the management by way of change in more than 30% of the directors of the NBFC.
  • Prior approval of RBI will be required in case of acquisition or transfer of shareholding for more than 10%.
  • In case there is a change in shareholding for more than 26% for the reason of buyback/reduction in share capital but this reduction/buyback should have been approved by the competent authority, no RBI approval will be required.
  • No RBI approval will be required in case of a change in the management by 30 % inclusive of Independent Directors or by rotation of the directors in Board.
  • Change in direction of the company requires a prior public notice at least 30 days prior to the announcement of such change.

APPLICATION FOR PRIOR APPROVAL OF RBI FOR MFI

The next step is to make an application to the RBI for the approval on the letterhead of the company along with the following required documents:

  • Information about Proposed directors and shareholders.
  • Information regarding sources of funds required for acquiring shares in the NBFC by the proposed shareholders.
  • Declaration by all the proposed directors and shareholders stating their non-association with any entity accepting deposits.
  • Declaration by all the proposed directors and shareholders stating their non-association with any entity to whom Certificate of Registration is denied by the RBI.
  • Statement regarding non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act by all the proposed directors as well as shareholders.
  • Bankers’ Report with regard to proposed directors and shareholders.

An application shall be submitted to the Regional Office of the Department of Non-Banking Supervision in whose control the Registered Office of the NBFC is located. All the queries raised by the RBI shall be timely answered in respect of the takeover so as to avoid any unforeseen delay in the approval. Usually, an application for NBFC takeover goes through a processing time of three to four months in the normal course of business.

For NBFC takeover acquirer can go through all the documents of the target company. For the purpose of takeover MOU (Memorandum of understanding) is signed between the target company and acquirer. For the reference of acquirer KYC documents and business plan for three years is prepared.  There is also a requirement of submission of documents which were submitted to RBI.

After obtaining RBI approval, public notice is given in two newspapers as per the RBI regulations indicating such change of management and inviting any objections from the public if any.

On the 31st day of newspaper notice or as mutually agreed by all the parties, signing of Share Purchase Agreement and handing over of change of management, payment of remaining considerations etc. to be carried out.

In the balance sheet of the target company, all assets will be liquidated and liabilities will be paid off and Acquirer will get neat and clean bank balance in the name of the company which will be calculated as a net worth as on the date of the takeover.

Before acquiring acquirer must verify that target company has complied with all reporting requirements of the Registrar of Companies, Taxation authorities and Reserve Bank of India, with no tax obligations.

Following documents will be required for the Due-Diligence Process:

  • Memorandum of Association
  • Articles of Association
  • Certificate of Incorporation
  • Shareholding Pattern
  • Financial Statements
  • Income Tax Returns
  • Bank Statements
  • Tax Registration Certificates
  • Tax Payment Receipts
  • Statutory Registers
  • Property Documents
  • Intellectual Property Registration or Application Documents
  • Utility Bills
  • Employee Records
  • Operational Records

After this, information must be verified from the company master data on the website of the Ministry of Corporate Affairs and inspection can be done.