How to start microfinance business without RBI approval legally in India?

Introduction

Do you want to start a microfinance business legally in India? Of course, you will say yes, as everybody wants to start the microfinance business but the real treat is when you can start the microfinance business without the RBI approval? Yes, you read it right.

We have found a legal way by which you can run your microfinance business without any RBI approval. The legal way is little bit typical one and hence we will explain every bit of information in detail so that you could understand it properly and will also help you implement the same properly.

Now, let us proceed to understand the same in detail.

What is an NBFC?

To understand how you can run a microfinance company without the RBI approval, you need to first understand the meaning of NBFC. An NBFC is a company registered under the Companies Act, 2013 which has financial activity as a principal business.

In simple words, if the company’s financial business does not constitute principal business, then the company will not be regarded as the NBFC and RBI license will not be required.

Hence, it is important to understand what actually constitutes the financial activity as the principal business.

What does financial business mean?

There are two conditions which will decide whether the financial activity will constitute your principal business. The two conditions are as follows;

• The financial assets constitute more than 50% of the total assets and
   
• Income from financial asset constitutes more than 50% of the gross income.

Any company which fulfills both the above criteria is known as NBFC and will have to take registration with the RBI. However, if any of the conditions is not fulfilled, then the company will not be classified as the NBFC and will not require any registration with the RBI.

How can you run microfinance without any RBI APPROVAL?

Suppose, you are running a company whose total assets worth Rs.20 lakh and total income is about 50 lakh. Now, you can start the microfinance business without any additional license but only up to a certain limit. You have to make sure that you do not fulfill both the above conditions in any case, because if you do, then you will need to get RBI license.

In our example, you must make sure that your financial asset does not cross 20 lakh and the total income does not cross Rs.50 lakh.

Why is it a loophole?

Actually, it is not a loophole but an intentional act of the RBI which is lesser known. RBI does not want every company to be registered as NBFC. RBI only wants those companies which are pursuing a financial activity as their primary source of income.

Hence, if the financial activity is not your primary source of income, then you may continue the financial business without the RBI license along with your other business.

Conclusion

If you are running any business and want to enter into the microfinance business, then you can do the same without any RBI license. But you need to make sure that you do not make it your principal business as explained above.

For more information, please email us at info@hubco.in.