# Microfinance Company Registration in Kerala | Section 8 Guide
Financial inclusion is the backbone of a developing economy. In Kerala, countless local entrepreneurs, farmers, and women in Self Help Groups (SHGs) have brilliant business ideas—from starting small tailoring units in Malappuram to launching organic spice farms in Wayanad.
However, traditional banks often refuse to lend to them because they lack collateral (like land or gold) to secure the loan. This is the massive market gap that **Microfinance Institutions (MFIs)** fill by providing small, unsecured (collateral-free) loans based on trust and group guarantees.
If you want to start an MFI in India, the standard legal route is registering an **NBFC-MFI** (Non-Banking Financial Company - Microfinance Institution) with the Reserve Bank of India (RBI). The catch? The RBI requires a massive minimum Net Owned Fund (NOF) of **₹2 Crores** just to apply for the license.
For most local entrepreneurs, raising ₹2 Crores is impossible. Fortunately, the Ministry of Corporate Affairs (MCA) provides a highly effective, 100% legal alternative: **The Section 8 Microfinance Company**.
In this comprehensive guide, we will break down exactly how you can start a lending business in Kerala without an RBI license.
## Table of Contents 1. What is a Section 8 Microfinance Company? 2. Section 8 vs. Nidhi Company vs. NBFC 3. The Exemption from RBI Registration 4. Core Rules of Section 8 Microfinance 5. The 5-Step Registration Process 6. Permitted Interest Rates and Margin Caps 7. Launch Your Microfinance Business with SKATT
## What is a Section 8 Microfinance Company?
A Section 8 Company is incorporated under the Companies Act, 2013, as a Non-Profit Organization (NGO). Its primary objective is the promotion of commerce, art, science, sports, education, research, social welfare, or charity.
When you incorporate a Section 8 company specifically with the objective of **"Microfinance"** or **"Financial Inclusion,"** you are creating a legal entity that is permitted to raise capital (donations or promoter funds) and lend it out as micro-credit to marginalized communities.
Even though it is technically an "NGO," the company is allowed to charge a reasonable interest rate on the loans to cover operational costs, pay employee salaries, and ensure the business remains self-sustaining. The only restriction is that the promoters cannot take the profits out of the company as dividends; the profits must be reinvested into the lending business.
## Section 8 vs. Nidhi Company vs. NBFC
It is critical to understand the legal boundaries before you start:
- **RBI NBFC-MFI:** Requires ₹2 Crore capital. Can borrow from banks and lend massively. Highly regulated. - **Nidhi Company:** Requires ₹10 Lakhs capital. **CAN** accept deposits from members. **CANNOT** give unsecured loans (loans must be backed by gold/property). - **Section 8 Microfinance:** No strict minimum capital. **CANNOT** accept deposits from anyone. **CAN** give unsecured (collateral-free) micro-loans to the public (target demographics).
## The Exemption from RBI Registration
Why does a Section 8 company not require an RBI license to lend money?
Under the RBI's Master Circulars regarding core investment companies and microfinance, Section 8 companies engaged in microfinance activities are **exempted from the core provisions of the RBI Act** (specifically Section 45-IA, which mandates NBFC registration), provided they adhere strictly to specific operational guidelines.
They are regulated by the Ministry of Corporate Affairs (MCA), which makes the incorporation and compliance process significantly easier and cheaper.
## Core Rules of Section 8 Microfinance
To maintain your RBI exemption and legal standing, your Kerala-based microfinance company must follow these absolute rules:
1. **No Deposits:** You are strictly prohibited from accepting Public Deposits (Savings accounts, RDs, FDs). You are a lending-only institution. 2. **Target Audience:** Loans must be directed towards empowering marginalized segments, low-income households, and micro-entrepreneurs. 3. **Unsecured Lending:** The primary product must be unsecured micro-credit (usually utilizing the Joint Liability Group (JLG) model where a group of women guarantees each other's loans). 4. **Loan Limits:** In the first cycle of lending, individual unsecured loans are generally capped (often around ₹50,000 to ₹1,00,000 max). 5. **No Dividend Payouts:** The founders/directors cannot declare a dividend. Any surplus generated from the interest must be added back to the company's loan corpus.
## The 5-Step Registration Process
1. **Digital Signatures:** Obtain Class-3 DSCs for all proposed directors (minimum 2 directors required). 2. **Name Approval:** Apply for the company name via the RUN facility on the MCA portal. The name usually ends with words like "Foundation," "Microcredit," or "Association" (e.g., *Malabar Microfinance Foundation*). You cannot use the word "Limited" or "Private Limited". 3. **Drafting MOA & AOA:** The Memorandum of Association is the most critical document. It must be drafted by a corporate lawyer, clearly stating that the objective is microfinance and social welfare, not profit maximization. 4. **Section 8 License (Form INC-12):** Apply to the Central Government (ROC) for the special Section 8 License. 5. **Filing SPICe+:** Once the license is granted, file the final incorporation documents to generate the Certificate of Incorporation, PAN, and TAN.
## Permitted Interest Rates and Margin Caps
A Section 8 Microfinance company is not a loan shark. You cannot charge 36% interest.
While the RBI does not directly license you, you must follow the RBI’s Fair Practices Code for microfinance. - The interest rate charged to the borrower should be reasonable. - The margin cap (the difference between the rate at which you borrowed the funds and the rate at which you lend to the borrower) is generally capped by RBI guidelines for MFIs (historically around 10% to 12%). - There should be no hidden charges or brutal recovery practices.
## Launch Your Microfinance Business with SKATT
Drafting the Memorandum of Association for a Section 8 Microfinance Company requires precise legal language. If the ROC feels your objective is purely commercial profit rather than social empowerment, your Section 8 license application will be rejected instantly.
At **SKATT Business Park**, our **Financial Consulting and Registration** division specializes in alternative lending structures. We handle the complex Section 8 License approval, draft compliant MOAs that satisfy the MCA, and ensure your post-incorporation lending policies adhere to RBI exemptions.
Empower your community with legal, structured micro-credit.
[Explore Our Corporate Registration Services](/consulting) | [Consult with a Microfinance Expert Today](/contact)
--- ## FAQ
**Can a Section 8 Microfinance Company take a loan from a Bank?** Yes. While it cannot accept deposits from the public, a registered Section 8 company can apply for term loans from commercial banks (like SBI or HDFC) or institutions like SIDBI/MUDRA, and use that wholesale money to lend retail micro-loans.
**What is the minimum capital required for Section 8?** Under the Companies Act, there is zero minimum capital required. However, practically, if you intend to lend money, you should incorporate the company with an initial paid-up capital of at least ₹1 Lakh to ₹5 Lakhs from the promoters to fund the first batch of loans.
**Do I need an office space to register?** Yes. You need a physical registered office address in Kerala. You must submit a rental agreement and a recent utility bill to the ROC during incorporation.
--- ## Strong CTA **Are you ready to transform your local economy with accessible micro-loans?** Do not let the lack of an RBI license stop you. Contact SKATT Business Park today to legally register your Section 8 Microfinance Company in Kerala.
