Govt bars Section 8 cos from microfinance biz

What Section 8 Says

- Cos with charitable nature come under Section 8

- Such cos promote commerce, art, science, sports, social welfare, etc

- Govt is against any microfinance activities by Section 8 cos

- Microfinance activity requires stringent monitoring

New Delhi: Concerned that Section 8 companies are altering their object clause and becoming microfinance and micro-credit companies, the government has directed the Director General of Corporate Affairs (DGCoA) and Registrar of Companies (RoC) that such changes be stopped.

Section 8 companies are those whose objective is charitable in nature like 'the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object,' says the Companies Act-2013. A Section 8 company is stipulated "to apply its profits, if any, or other income in promoting its objects; and (c) intends to prohibit the payment of any dividend to its members…"

The Ministry of Corporate Affairs (MCA) has instructed the DGCoA that it should ensure strict compliance in the subject, officials told Bizz Buzz.

Two years ago, the Ministry had disallowed the use of the word 'microfinance' in the name of Section 8 companies. The Ministry is against any microfinance activities by Section 8 companies because to carry out such activities a company has to comply with the stringent criterion of net-owned funds, which has been laid down by the Reserve Bank of India (RBI).

Section 8 companies are neither expected to comply with this criterion nor do they do that. This puts public money at risk.

As per extant guidelines, according to the RBI, each non-banking finance company-microfinance institution (NBFC-MFI) is required to maintain not less than 85 per cent of its net assets as 'qualifying assets.' Eligibility criteria for 'qualifying assets,' i.e. microfinance loans for NBFC-MFIs, include a number of parameters.

Ideally, microfinance loans should be used for income-generating activities, as their main objective is to enable borrowers to work their way out of poverty by undertaking income generating activities, says the RBI. Borrowing for non-income generating purposes may also tempt the borrowers to borrow in excess of their repayment capacity.

However, providing access to credit for other purposes such as repayment of high-cost loans to moneylenders, education, medical expenses, consumption smoothing, acquisition of household assets, housing, emergencies, etc., is also equally important in the Indian context, says the central bank.

As microfinance is useful in smoothing consumption and relieving seasonal liquidity crises, it obviates the need for high-cost borrowing from informal sources. However, these limits are only applicable to NBFC-MFIs representing only around 30 per cent of the microfinance loan portfolio, says the RBI.