ICICI Bank in Microfinance: Breaking the barriers

Agenda
About ICICI Group

Micro-finance in India
ICICI Bank & Micro-finance Issues

The ICICI Group today

Largest Largest Over

private sector bank in India consumer credit provider in India

15 million retail customer accounts

Serving
Largest

over 2000 large and small corporate houses with a variety of wholesale and treasury products
private sector life and general insurer in India a global presence
Building

Largest
Asset

rural and micro loans provider in the country

base of ~US$ 45 bn, PAT of about US$500 mn

Agenda
About ICICI Group

Micro-finance in India
ICICI Bank & Micro-finance Issues

Rural banking in India: progress made

Indian banking system has achieved a formidable outreach in rural areas

49% (32,538) of all scheduled commercial bank branches are rural 31% (131.1 million) of the total deposit accounts are in rural India 43%(22.4 million) of total credit accounts are in rural India Number of people per branch has reduced from 64,000 in June 1969 to 15,000 in June 1997 (all India average)
Source: BSR, March 31, 2001, Table 1.3, RBI Deolalkar, G.H., The Indian Banking Sector: On the road to progress, A Study of Financial Markets

But large gaps persist in outreach to the poor

For the rural population of 741.0 million

Population per branch: 22,793 Penetration of savings accounts is below 18%

As

against 104% in urban and semi-urban areas

Number of villages per branch: 19

High dependence on informal sources

36% of rural credit from informal sources Dependence even higher for lower income households: 78%
Source: BSR, March 31, 2001, Table 1.3, RBI Census, 2001 Mahajan, VijayA framework for building a sustainable rural financial system (RFS) for India, BASIX, www.basixindia.com

Banking with poor is challenging

Nature of Demand

Nature of Supply
High

Doorstep banking in timings

cost of service delivery

Flexibility Timely

Timings

availability of

and procedures: Rigid and inflexible

High

services
Low

value and high volume transactions

Require

transaction cost for the customers

Expansion

simple processes with minimum documentation

of branch network expensive and time taking

and conventional banking was not poised to meet these demands

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leading to new innovations in credit delivery

SHG-Bank Linkage Program launched with ambitious targets

Govt / NABARD

Nearly 1 mn SHGs promoted Rs.39 bn disbursement

Variety of models under implementation with stress on MFIs/NGO

Door step delivery of services Professional management and computerized systems

Agenda
About ICICI Group

Micro-finance in India
ICICI Bank & Micro-finance Issues

Bank-led Model for Self Help Groups (SHGs)

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The SHG Bank linkage Model

Structure

Characteristics Public Sector banks implementing Government schemes Poverty eradication Financing farmers and small entrepreneurs Emphasis on SHGs Concept promoted by NABARD I mn SHGs financed Innovative Practices Oriental Bank

Bank

Branch

NGO

SHG Branches assess credibility of individual SHG and monitor repayment process Group formation by Bank or NGOs
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was modified by ICICI Bank

Divisional Manager ICICI Bank staff Project Manager

20 Bank employees able to manage project

Outsourced staff (leaders of old SHGs)

Coordinators Promoters

1 Coordinator manages 6 Promoters with each Promoter forming & managing 20 SHGs Group of 20 poor women

Community

SHGs

thereby enabling increase in outreach from 1,200 SHGs to more than 12,000 SHGs in 3 years
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Bank led SHG banking was not scalable

Limited

Existing Branches

outreach Concentrated in urban areas High cost low ticket items Cash intensive transaction Transaction cost of 8-20%

High

New Branches

infrastructure costs High operating overheads Long gestation period Low technology usage in rural areas Transaction at branch costs US$ 1 vis-a-vis 25 cent at ATM

and we decided to look beyond our own network

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at channels of MFI lending Clients

MFI Extends loan to clients Create charge on capital for the loan to clients Bank Extends loan to MFIs

Create charge on capital for the loan to MFI

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Optimising costs
Bank Costs
Branch licence manpower intensive process

MFI Costs
Branch licence not applicable Staff costs substantially lower due to hiring of local manpower

Staff Costs at least 10 times due to higher salary structure in Commercial banks

Larger overheads due to centralised operations and larger gegraphies covered

Considerably lower cost structures due to local area approach

Leading to a reduction of upto 6% in transaction costs

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But opening up new challenges

Double counting of capital by bank and MFI Sub-optimal lending structure

Lower flow of resources from banks

Higher pricing than warranted by riskiness of portfolio due to size of balance sheet

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leading to the paradox

Banking System Banking system capable of providing large quantum of wholesale finance to the ultimate clients Grass-root agencies capable of providing origination and supervision support in a cost-effective manner

MFIs / NGOs

Clients

A burgeoning segment with effective demand for finance

of supply not being channelised to meet the demand

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Issues
Need for structures that Uses capital parsimoniously Permits all the costs of the operation to be recovered in a commercially viable manner and incentivises growth Preserves the incentives of the originator (of the portfolio) to maintain portfolio performance

Careful selection of borrowers Ongoing supervision and management

information

through structures capable of massive scale up

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