Can a Section 8 Company Do Micro Finance Business in India?

Aspiring entrepreneurs frequently ask if a Section 8 company can be registered for a microfinance business. The answer is a clear No. The Ministry of Corporate Affairs (MCA) strictly prohibits the use or amendment of a Section 8 company for micro-finance activities. The only legal way to enter the microfinance sector is to register as an NBFC-MFI (Non-Banking Financial Company – Micro Finance Institution) with approval from the Reserve Bank of India (RBI). This guide will detail the reasons for the prohibition, the relevant MCA/RBI regulations, and the complete process for legally starting a microfinance business in India.

What is a Section 8 Company? 📋

A Section 8 company is a type of company registered under Section 8 of the Companies Act, 2013, for promoting charitable objectives such as commerce, art, science, education, sports, social welfare, religion, charity, or environmental protection. These companies operate on a not-for-profit basis and are prohibited from distributing dividends to their members. Any profits earned must be applied towards promoting the company’s objects.

Section 8 companies enjoy privileges such as exemption from using “Limited” or “Private Limited” in their name and can be incorporated with lower capital than other company forms. Due to these benefits, many entrepreneurs tried to use the Section 8 structure as a shortcut to enter microfinance, a practice the MCA has now stopped.

Why Section 8 Companies Cannot Do Micro Finance Business

The Core Issue: In India, the Reserve Bank of India (RBI) regulates lending and financial services under the RBI Act, 1934. Only registered Non-Banking Financial Companies (NBFCs) with an RBI Certificate of Registration (CoR) are authorised to conduct financial business, including microfinance. Although a prior RBI Master Circular (July 1, 2015) exempted Section 8 companies from certain micro-lending limits, the Ministry of Corporate Affairs noted widespread misuse. Many Section 8 companies engaged in microfinance without meeting the mandated Net Owned Fund (NOF) and other RBI regulatory requirements.

MCA’s Prohibition (A Timeline of Circulars): The MCA issued a series of directions and circulars to stop this misuse. Here is the chronological timeline of how this prohibition evolved:

What General Circular No. 05/2022 Says

The General Circular No. 05/2022 dated 30 May 2022 is the definitive MCA direction on this matter. The key observations and directions in this circular are as follows:

It was observed that various Section 8 companies altered their object clauses to carry out microfinance activities by passing Special Resolutions, changing Activity Codes, and filing e-form MGT-14 with ROCs. The MCA noted that although ROC (CRC) did not allow incorporation with microfinance objects initially, companies found workarounds through post-incorporation amendments.

The Only Legal Route – NBFC-MFI Registration with RBI

To start a microfinance business in India legally, you must register as an NBFC-MFI with the Reserve Bank of India. This is governed by the RBI Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 (RBI/DOR/2021-22/89, dated March 14, 2022, updated July 17, 2025).

What is an NBFC-MFI?

An NBFC-MFI is a non-deposit-taking NBFC with at least 60% of its total assets (net of intangible assets) deployed towards “microfinance loans” as defined by RBI’s Regulatory Framework for Microfinance Loans, 2022. This threshold was revised from 75% to 60% by RBI Circular No. RBI/2025-26/44 dated June 6, 2025, to provide operational flexibility while keeping focus on the core microfinance mandate.

What is a Microfinance Loan?

Under the RBI’s framework, a microfinance loan is a collateral-free loan to a household with an annual income of up to ₹3,00,000. A household means an individual family unit—husband, wife, and their unmarried children.

Eligibility to Start a Micro Finance Business (NBFC-MFI)

NOF Glide Path for Existing NBFCs

RBI provided a phased glide path for existing NBFCs to meet enhanced NOF requirements under the Scale-Based Regulation (SBR) Framework:

Note: As per the latest RBI clarification, there shall be no distinction in the NOF requirement for NBFCs registered in the North East Region for the final target of ₹10 crore.

Step-by-Step Process to Register an NBFC-MFI 📝

Registering an NBFC-MFI involves two major stages: company incorporation under the Companies Act and obtaining the Certificate of Registration (CoR) from the RBI. Here is the step-by-step process:

Step 1: Incorporate a Company Under the Companies Act, 2013. 

Register a public or private limited company with the Registrar of Companies (ROC) via the SPICe+ form. The Memorandum of Association (MOA) should include financial services and microfinance lending objects. Obtain the Certificate of Incorporation (CoI) and arrange minimum paid-up capital equal to the NOF requirement.

Step 2: Arrange Net Owned Fund (NOF) of ₹10 Crore. 

The company must have an NOF of at least ₹10 crore in equity capital and free reserves, less accumulated losses, deferred revenue expenditure, and intangible assets. Obtain a Chartered Accountant’s certificate confirming the NOF.

Step 3: Prepare a Comprehensive Business Plan. 

Draft a detailed 5-year business plan covering the company’s objectives, target market, geographic areas of operation, loan products, financial projections, risk management strategy, HR plan, and technology infrastructure for microfinance operations.

Step 4: Submit Online Application to RBI 

Apply online through the RBI’s COSMOS portal for a Certificate of Registration as an NBFC-MFI. The application must include all required documents, audited financial statements, directors’ profiles, business plan, and the CA certificate of NOF.

Step 5: Submit a hard copy to the RBI Regional Office. 

After online submission, submit a physical copy of the complete application and all supporting documents to the RBI Regional Office under whose jurisdiction the company’s registered office falls.

Step 6: RBI Due Diligence and Approval. 

RBI will thoroughly examine the application, including background checks of promoters and directors, assessment of the business plan, and compliance with norms. The process typically takes 6 to 12 months from application, depending on documentation completeness and RBI processing times.

Step 7: Obtain Certificate of Registration (CoR) 

Upon satisfactory completion of due diligence, the RBI issues a Certificate of Registration (CoR) authorising the company to commence micro finance business as an NBFC-MFI.

Section 8 Company vs. NBFC-MFI — Key Differences

The following table highlights the fundamental differences between a Section 8 company and an NBFC-MFI for micro finance operations:

What About Existing Section 8 Companies Already Doing Micro Finance?: The RBI Master Direction on Regulatory Framework for Microfinance Loans, 2022 (Paragraph 9) addresses the position of existing Section 8 (not-for-profit) companies engaged in microfinance activities. The key provisions are as follows:

• The exemption from Sections 45-IA, 45-IB, and 45-IC of the RBI Act, 1934, has been withdrawn for not-for-profit companies engaged in microfinance activities that have an asset size of ₹100 crore and above. Such companies are required to register as NBFC-MFIs with the RBI.
  
• Not-for-profit companies that are not eligible for exemption (i.e., those with assets of ₹100 crore and above) are required to submit an application for NBFC-MFI registration to the RBI within three months of the issuance of the circular. If they do not currently comply with NBFC-MFI regulations, they must submit a board-approved plan with a roadmap to meet the prescribed requirements.
  
• For smaller Section 8 companies (below ₹100 crore in assets) that were exempted earlier, the definition of microfinance loans has been aligned with the new framework — collateral-free loans to households with annual income up to ₹3 lakh.
  

In simple terms, the RBI is progressively bringing all microfinance activity under its regulatory oversight, and the era of unregulated microfinance through Section 8 companies is effectively over. 🔒

Penalties and Consequences of Violation: Operating a microfinance business without proper RBI authorisation carries serious consequences under the following provisions:

• Section 45-IA of the RBI Act, 1934 — Carrying on financial business without a Certificate of Registration is an offence. The RBI can issue directions for cessation of such activities.
• Section 8(9) of the Companies Act, 2013 — If a Section 8 company contravenes any of the conditions subject to which a licence was granted, the Central Government may revoke the licence and direct its winding up. The company, and every officer in default, shall be punishable with a fine of up to ₹25 lakh. The directors and managers may also face imprisonment for up to 3 years.
• ROC Action — As directed by MCA General Circular No. 05/2022, ROCs are actively monitoring Section 8 companies to ensure that none of them carries out micro finance activities. Any attempt to alter the object clause for this purpose will be rejected at the e-form processing stage itself.

Conclusion

To start a microfinance business in India, RBI approval is mandatory. Section 8 companies are not permitted to conduct microfinance activities, as clarified by MCA’s General Circular No. 05/2022. The RBI’s regulatory framework, including the Master Direction on Microfinance Loans, 2022 and the Scale-Based Regulation Framework, governs this sector. To proceed, one must form a company, secure the requisite ₹10 crore NOF, and apply for NBFC-MFI registration with the RBI. Contact SetIndiaBiz for end-to-end NBFC-MFI registration assistance.

Frequently Asked Questions (FAQs) 💬

Can I register a Section 8 company with microfinance as its main object?

No. As per MCA’s direction letter dated 10 February 2020 and General Circular No. 05/2022 dated 30 May 2022, the ROC (CRC) will not allow incorporation of a Section 8 company with micro finance or micro credit in its object clause. This applies to both fresh incorporations and amendments to existing MOAs.

Why did MCA ban Section 8 companies from doing microfinance?

The MCA observed that Section 8 companies were being used to carry out micro finance activities without meeting the Net Owned Fund (NOF) requirements and other regulatory conditions prescribed by the RBI through its Non-Banking Financial Company – Micro Finance Institutions Directions. This created a regulatory loophole that the MCA addressed through multiple circulars.

What is the minimum capital required to start a microfinance business legally?

To register as an NBFC-MFI with the RBI, you need a minimum Net Owned Fund (NOF) of ₹10 crore. This is the revised requirement under RBI’s Scale-Based Regulation Framework (Circular dated October 22, 2021), with the final deadline for all existing NBFCs to achieve this being March 31, 2027.

Can an existing Section 8 company convert itself into an NBFC-MFI?

While there is no direct conversion mechanism, an existing Section 8 company with assets of ₹100 crore and above that is engaged in microfinance activities is required to register as an NBFC-MFI with the RBI as per Paragraph 9 of the Master Direction on Regulatory Framework for Microfinance Loans, 2022. The entity would need to meet all NBFC-MFI requirements, including the ₹10 crore NOF threshold.

Is the RBI exemption for Section 8 micro finance companies still valid?

The exemption provided under RBI’s Master Circular dated July 1, 2015, is now substantially narrowed. For Section 8 companies with assets of ₹100 crore or above, the exemption from Sections 45-IA, 45-IB, and 45-IC of the RBI Act has been withdrawn. Even for smaller entities that technically retain the exemption, the MCA’s prohibition on incorporation with micro finance objects and on amending the MOA for this purpose effectively prevents new Section 8 companies from entering the micro finance space.

What kind of loans can an NBFC-MFI provide?

An NBFC-MFI can provide collateral-free microfinance loans to households with an annual income of up to ₹3 lakh. There is no cap on individual loan amounts under the revised 2022 framework, but the pricing must comply with RBI’s guidelines on fair practices, and the Key Fact Statement (KFS) must be provided to every borrower.

How long does the NBFC-MFI registration process take?

The complete process from company incorporation to receiving the Certificate of Registration from RBI typically takes 6 to 12 months, depending on documentation completeness and RBI’s processing queue. A well-prepared business plan and complete documents can help expedite the process./div>

Author Bio

Editorial Team

Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.