NBFCs and Microfinance institutions are small sizes financial institutions compared to the scheduled banks. NBFCs are regulated by the provisions of the RBI Act and are registered as a company under the Companies Act. But the MFIs are termed as a self-regulating body. There are some other fundamental differences between NBFCs and Microfinance institutions. Let’s understand them in the following sections.
Understanding NBFCs

Non-Banking Financial Company refers to companies registered under the Companies Act 2013 and regulated by the Reserve Bank of India. The main activities of an NBFC are related to small-time lending that including giving loans to manufacturers, credit facility, savings, and investment products, trading at money market, managing portfolios of stocks, transfer of money, etc. NBFCs are generally not allowed to accept repayable deposits. However, they can accept term deposits from their members.

Microfinance Companies

Microfinance Institution (MFI) operates at a smaller level as compared to NBFCs. It serves the motive of financial inclusion by providing lending services to the underprivileged and impoverished sections of the society that lack access to traditional banking facilities. MFI lends microloans to poor people that ranges from Rs. 1000 to 20000 for starting a business. There have been complaints of irregularities in the functioning of MFIs as they charge relatively higher interest rates than the NBFCs. Besides, they mainly indulge in giving loans in contravention to the directives issued to such MFI to newly formed groups within 15 days of formation.

How Do MFIs Differ from NBFCs?

Both Microfinance Companies and NBFCs have a major role to play in the financial inclusion of the rural areas. Where banks are absent, the NBFC can perform similar functions to a bank. Although Non-Banking Financial company can’t issue checks drawn on itself it can facilitate medium-scale lending. Whereas, MFIs are established to operate at a smaller level than NBFC and provide small loans facilities to the underprivileged sections of the society. Unlike NBFCs, the Micro Finance bodies are not regulated by any regulatory institution of the government. However, if they act as a representative to an NBFC MFI then they come under the regulation of RBI. The state governments have taken some steps to convert MFIs into NBFCs to ensure better regulation by RBI and give them access to wide-scale funding from banks.

Advantages of Opening an NBFC

Ensures the smoother flow of credit for small debtors and so acts as an important tool of maintaining accuracy in the market.
Catering to a variety of clients in online/offline mode with a relatively smaller size of staff.
Reduces load on other lenders and hence loan processing time is also reduced leading to an overall increase in efficiency of the lending process.
Reduces the risk of lending bad loans as the profile of a customer is analyzed by NBFCs before considering their eligibility for the loan.
It is recommended for new entrepreneurs reach out to firms specializing in the NBFC registration process. These firms have financial experts who can help the promoters in obtaining NBFC license easily. Hiring an expert will help in filing the Application correctly, compile all the necessary documents, and getting all the verification done on time.