India is currently considered the largest emerging market for microfinance institutions (MFIs). Commonly described as the bank for the poor, MFIs offer three basic services: savings, credit and insurance. Setting up an MFI is not a Herculean task – provided your priorities are clear.
Before setting up a microfinance institution, it is imperative to come to a decision about one basic premise: do you want your MFI to be a non-profit or a for-profit institution?
Non-profit MFIs are set up as trusts or societies with the aid of grants and donations, registered under the Societies Registration Act, 1860, or the Indian Trust Acts, 1882. In fact, most such MFIs started out as NGOs.
If you decide to setup a for-profit MFI, there are two models to choose from: a non-banking financial company(NBFC) or a co-operative. Unlike an NBFC, a co-operative is entitled to take on savings accounts. A co-operative brings with it ownership, your customers are also owners.
Get a License from RBI
If you are setting up an NBFC, the Reserve bank of India (RBI) is the only authorized body that’s registered to grant youo a license. For this, you will need to raise Rs. 2 crore in capital. The process usually takes three to four months. You can also buy existing licenses of defunct companies from the RBI. This should cost you onwards of Rs. 25 lakh. Check http://www.rbi.org.in for more information. To obtain a license for a co-operative, contact the Registrar of Companies.
Decide your operational model
Most MFIs use groups for the intermediary financial transactions. But there are different way in which you can work with these groups. MFIs are broadly classified into two models: Self Help Groups (SHGs) and the Grameens. You must also decide the financial and non-financial services that you will be willing to offer. To better understand your customers, conduct a market survey. Also, it is advisable to run a pilot program for around 1 year, which will help you build the cohesion and helps you better tailor your products and services to your clientele.
– You may require 5-6 field workers, people who actually meet and interact with the target customers. It is advisable to choose the field workers with ethnic profile from your customer base.
– You may require few people to look after the accounts, and manage the MSME.
Get a bank loan
MFIs fall under the ‘priority sector‘ identified by the Government of India. The pilot program helps to gain the bank’s trust and put you at an advantage as you approach the banks. As always in business, it is advisable to source your funds from two to three different banks. Below are a few links that may be useful:
This post will be followed up with more details about the operational models of MFI.