Quick answerA microfinance company in India is set up through one of two routes. A Section 8 company can lend small amounts to the poor on a not-for-profit basis, and certain such companies are exempt from RBI registration if they stay within RBI's conditions. A commercial lender must register with the RBI as an NBFC-MFI under section 45-IA of the RBI Act, meet the net owned fund requirement and follow the RBI (Regulatory Framework for Microfinance Loans) Directions, 2022.
- Law
- Companies Act 2013, RBI Act 1934
- Regulator
- RBI for NBFC-MFIs; MCA for Section 8
- Microfinance loan
- Household income up to ₹3 lakh a year
- NBFC-MFI NOF
- Rising to ₹10 crore by March 2027
The two routes compared
| Point | Section 8 microfinance company | NBFC-MFI |
|---|
| Nature | Not-for-profit company licensed under section 8 | Commercial non-banking financial company |
| RBI registration | Not required if it satisfies the conditions of RBI's exemption for Section 8 companies doing microfinance | Compulsory certificate of registration under section 45-IA |
| Capital | No minimum capital under company law | Net owned fund as prescribed by RBI, being raised in phases to ₹10 crore |
| Profits | Applied to objects; no dividend to members | Can distribute dividends to shareholders |
| Public deposits | Not allowed | Not allowed for new NBFCs |
| Funding sources | Founders' capital, grants, donations, CSR and borrowings | Equity, bank and institutional borrowings, securitisation |
| Typical scale | Local or regional, mission-led | Regional to national |
Most first-time founders with limited capital start with the Section 8 route. Promoters with significant capital and lending experience, aiming at a regulated lending business, choose the NBFC-MFI route.
The Section 8 route in detail
A Section 8 company with objects such as poverty alleviation, women's empowerment and financial inclusion can lend to the poor. RBI's exemption directions excuse certain Section 8 companies engaged in microfinance from the requirement of registration under section 45-IA, but only if they meet specific conditions: they do not accept public deposits, and their loans stay within the purpose and loan-size limits RBI has prescribed for business and housing loans to poor persons.
This is where many promoters go wrong. The exemption is narrow. Lending beyond those limits, lending to people who are not poor, charging excessive interest, or collecting deposits takes the company outside the exemption and can be treated as unauthorised NBFC activity. Some state laws on money-lending and microfinance may also apply. We check the current RBI conditions and the law of the state where you operate before you begin lending, and draft the objects and lending policy accordingly.
A Section 8 microfinance company also has to keep its own governance clean: loans must not go to directors, members or their relatives on favourable terms, interest income must be applied to the objects, and accounts must show the loan portfolio, overdue loans and write-offs honestly. Donors and banks review these figures before supporting the organisation.
The NBFC-MFI route in detail
An NBFC-MFI is a non-deposit-taking NBFC registered with the RBI, at least 75% of whose total assets are microfinance loans. The process follows NBFC registration: incorporate a company with lending objects, bring in the net owned fund, and apply to the RBI for a certificate of registration with business plans, KYC and fit-and-proper information about promoters and directors.
Under RBI's scale-based regulation, the net owned fund requirement for NBFC-MFIs is being raised in phases to ₹10 crore by 31 March 2027. RBI scrutinises the source of funds, the promoters' track record and the management team's lending experience closely, so the application needs careful preparation. Because RBI processing takes time, some promoters consider acquiring an existing registered NBFC instead, which needs RBI's prior approval through an NBFC takeover.
RBI's 2022 microfinance framework
The RBI (Regulatory Framework for Microfinance Loans) Directions, 2022 apply from 1 April 2022 to all regulated entities giving microfinance loans, including banks and NBFCs. Key rules:
- A microfinance loan is a collateral-free loan to a household with annual household income up to ₹3 lakh, whatever the purpose of the loan.
- Loan repayments by the household, across all its loans, must not exceed 50% of monthly household income.
- Every lender must have a board-approved policy on household income assessment and on pricing, including a ceiling on interest rates and charges. There is no RBI-fixed interest cap.
- No prepayment penalty on microfinance loans, and flexibility in repayment periodicity as agreed with the borrower.
- A simplified, standardised fact statement must be given to the borrower, and recovery practices must not involve harassment.
- NBFCs that are not NBFC-MFIs can hold microfinance loans only up to 25% of their total assets.
Even where a Section 8 company is outside RBI regulation, following these standards is good practice and often a condition of bank or donor funding.
Setting up the company step by step
- Route decision: based on your capital, funding sources and lending plans.
- Incorporation: a Section 8 company with microfinance objects, or a company with lending as its main object for the NBFC-MFI route.
- Policies: credit policy, household income assessment, pricing, fair practices code, KYC and anti-money-laundering, and grievance redressal.
- Registrations: RBI certificate of registration for an NBFC-MFI; income-tax registration and, where relevant, CSR-1 for a Section 8 company.
- Systems: loan management software, credit bureau membership for regulated lenders, and field-staff training on fair recovery.
Funding the lending book
The loan book is only as large as the money behind it, so funding needs planning from the start. A Section 8 microfinance company typically begins with founders' contributions, grants, donations and, once eligible, CSR funds for capacity building. As its track record grows, it may borrow from banks, financial institutions and development agencies, which will look at its governance, portfolio quality and audited accounts.
An NBFC-MFI raises equity from promoters and investors and borrows from banks and other lenders. Loans by banks to NBFC-MFIs for on-lending can count towards banks' priority sector targets subject to RBI conditions, which makes well-run NBFC-MFIs attractive borrowers. In both routes, lenders and donors expect clean books, a working loan management system, credit bureau checks on borrowers and evidence of fair practices before they commit funds.
Choosing the route is therefore also a funding decision: grant and CSR money fits the Section 8 model, while commercial debt and equity fit the NBFC-MFI model.
Common mistakes
- Calling an ordinary private company a "microfinance company" and lending to the public without RBI registration.
- Accepting savings or deposits from borrowers, which neither route permits.
- Assuming the Section 8 exemption covers any loan size or any borrower.
- Underestimating the capital, compliance and time needed for an NBFC-MFI.
Running financial services without the right registration can lead to prosecution and to the business being shut down, so the structure must be settled before the first loan is given.
Documents you need
For the promoters and the proposed company:
- PAN, Aadhaar and address proof of each promoter and director
- Passport-size photographs
- Registered office proof and no-objection letter
- Brief business plan: area of operation, target borrowers, loan products
- Source of funds for capital (NBFC-MFI route)
- Educational and professional background of directors, especially lending experience
- Credit reports and declarations of directors (NBFC-MFI route)
How we handle it for you
Route advice
We assess your capital, plans and state of operation and recommend Section 8 or NBFC-MFI in writing.
Incorporation
Company incorporated with objects drafted for microfinance.
Policies
Credit, pricing, fair practices and KYC policies drafted for board approval.
Registrations
RBI application, or income-tax and CSR registrations, prepared and filed.
Compliance support
Ongoing RBI or ROC filings and policy reviews.
Why clients choose ProudLegal
Advocates who appear in courtYour matter is drafted and argued by enrolled advocates, not call-centre staff.
Company and tax filings in-houseCompany secretaries and tax professionals handle registrations and returns.
Fees agreed in writingYou receive a written fee quote before any work begins.
Updates on WhatsApp and emailEvery hearing date, filing and document is shared as it happens.
Please note: this page explains the law and procedure in general terms as on 30 October 2026. Fees, limits and timelines change, and the facts of each case matter, so take advice on your own papers before acting.
Frequently asked questions
Does a Section 8 microfinance company need RBI registration?
Not if it meets RBI's conditions for the exemption, including no public deposits and lending within the prescribed limits to poor persons. Outside those conditions, registration is required.
What is the household income limit for a microfinance loan?
Under RBI's 2022 framework, a microfinance loan is a collateral-free loan to a household with annual income up to ₹3 lakh.
What is the net owned fund for an NBFC-MFI?
RBI's scale-based regulation is raising it in phases to ₹10 crore by 31 March 2027. Check RBI's current directions at the time of applying.
Can a microfinance company accept deposits?
No. Neither a Section 8 microfinance company nor a new NBFC-MFI can accept public deposits.
Is there an interest rate cap on microfinance loans?
RBI does not fix a cap. Each lender must have a board-approved pricing policy with a ceiling on interest rates and charges.
Can a private limited company do microfinance without RBI registration?
No. A company whose principal business is lending must register with the RBI as an NBFC unless a specific exemption applies.
How long does NBFC-MFI registration take?
RBI processing usually takes several months, and longer if RBI raises queries on promoters, funds or the business plan.
Can a Section 8 microfinance company receive CSR funds?
Yes, once it holds income-tax registration and approval and has registered with the MCA in Form CSR-1.
