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Starting an MFI - Micro finance institutions

Micro finance institutions normally provide credit to poor people and many MFI's also offers services like accepting small savings and insurance services. MFI's normally charge annual interest rate of close to 30% annually approximately and though this might be considered high but many poor people have no access to capital except from private money lenders; who charge not only exorbitant interest rates ( sometimes close to 100%) but also lack transparency . Contrary to what many believe, bad debts or bad loans in micro finance credit are very rare . Industry average of bad debts or loans would approximate about 2% only.

There is a distinct advantage of starting a MFI in India as this sector is not prone to slow down as presently witnessed in other sectors. India's rural economies have not been much affected by the global slowdown.

Starting an MFI. is not as complicated as other businesses in the financial sector and MFIs are traditionally floated by credit societies and trusts for dispersing credit among those they serve. Individuals or groups of people can also incorporate a not for profit company under the company's act, 1956. The third category is for companies that have to be registered as NBFC -- nonbanking finance corporation with the RBI that required a bigger capital. As for Reserve Bank of India norms the minimum capital to be raised for start-ups in case their operating as a Section 25 company or a not for profit company must not be lower than Rs 25 lakhs , where as starting a NBFC requires Rs 2 crores.

The potential for a new entrant in the micro finance sector is quite large and promising for people who are creative and willing to cater to India's vast rural market. With the recent liquidity crunch new entrants in the MFI sector should be prepared for high liquidity costs. As this is the most critical aspect in starting a MFI . To create a sustainable business model in this business one has to not only arrange finance at the right cost but also ensure its proper utilization. This is a business which requires both your brain as well as your heart to identify with the customers and provide creative solutions. There are many dedicated private equity and venture capital funds that normally invest in micro finance institutions .

There are approximately 1000 macro finance institutions operating in India currently. There is a large section of Indians living below the poverty line and as such the demand for micro finance institutions in India is likely to surge.