ICICI BANK

in Micro-finance
 PRESENTATION OUTLINES
1. Introduction to institutional credit in
India
2. Introduction to ICICI bank
3. ICICI bank’s entry in to rural
market
4. Micro finance initiatives
5. Issues
6. Queries
 INTRODUCTION

AFTER INDEPENDENCE MOST CHALLENGING JOB WAS TO

ALLEVIATE THE POVERTY.

TAKE FINANCIAL SERVICES TO THE UNDER SERVED SEGMENTS

DEVELOPMENT FINANCIAL INSTITUTES WERE SET UP TO SUPPORT

•INDUSTRIALISATION
•INFRASTRUCTURE DEVELOPMENT
 INSTITUTIONAL CREDIT SYSTEM IN INDIA

 DESPITE STEPS TAKEN & PROGRAMME/SCHEMES IMPLEMENTED BY

CENTRAL & STATE GOVERNMENTS FOR ALLEVIATION OF POVERTY AND
NUMBER OF BANKS & FINANCIAL INSTITUTIONS COMING INTO
EXISTENCE, THE LOWER STRATA OF SOCIETY DID NOT STAND TO
BENEFIT.

COMMERCIAL BANKS SET UP TO IMPROVE DELIVERY OF FINANCIAL

SERVICES & TAKE ACCESS NATION-WIDE.FREQUENT LOAN WAIVERS
LED TO HIGH DEFAULT RATE.

THERE WAS REQUIREMENT OF 18% OF ADVANCE TO BE

COMPULSORILY MADE TO AGRICULTURE SECTOR AS DIRECT LENDING.

CREDIT DELIVERY TO RURAL AREAS, PREDOMINANTLY FOR

AGRICULTURE, AND FINANCIAL SERVICES TO UNDESERVED, WERE
Contd..
CONSIDERED SYNONYMOUS.
Contd..

VERY FEW PROGRAMMES FOCUSED ON MICRO ENTERPRISES OR

ENCOURAGED DIVERSIFICATION FROM AGRICULTURE. THIS LED TO A
FOCUS ON MERELY GEOGRAPHICAL EXPANSION TO RURAL AREAS.

THE CREDITS OFFERED BY BANKS WERE TOO LARGE TO BE MADE OF

BY THE POOR RATHER THAN A SUITE OF PRODUCT DESIGNED TO CATER
TO THEIR NEED. HENCE HIGH DEFAULT.

IN EARLY 1990S, NABARD INTRODUCED SELF HELP GROUP (SHG) BANK
LINKAGE MODEL WHICH BEGAN GETTING ATTENTION IN RURAL
AREAS, WHILE HELPING IN ACHIEVE LOWER TRANSACTION COSTS
THROUGH SERVING SEVERAL PERSONS AT ONE POINT.

THE GROUP ALSO ACTED AS AN OUTSOURCED RISK ASSESSMENT &

MONITORING SYSTEM WITH LOCAL LEVEL PRESENCE & KNOWLEDGE.
THE CO GUARANTEE GIVEN BY THE MEMBERS ALSO SERVED AS A
CHECK ON DEFAULT & PUT PRESSURE ON BORROWERS TO PAY BACK
DUES IN TIME.
 INTRODUCTION TO ICICI
BANK
PROMOTED BY ICICI LTD. IN 1994
2ND LARGEST BANK BUT LARGEST PRIVATE SECTOR BANK IN INDIA
LARGEST CONSUMER CREDIT PROVIDER IN INDIA
OVER 15 MILLION RETAIL CUSTOMER ACCOUNTS
SERVING OVER 2000 LARGE AND SMALL CORPORATE HOUSES WITH A
VARIETY OF WHOLESALE AND TREASURY PRODUCTS
LARGEST PRIVATE SECTOR LIFE AND GENERAL INSURER IN INDIA
BUILDING A GLOBAL PRESENCE, SUBSIDIARIES IN THE UK, CANADA,
RUSSIA, BRANCHES IN SINGAPUR,BAHRAIN
LARGEST RURAL AND MICRO LOANS PROVIDER IN THE COUNTRY
ASSET BASE OF US$ 45 BN, PAT(PROFIT AFTER TAX) OF ABOUT US$500
MN
ADR’s(AMERICAN DEPOSITORY RECIEPTS ) LISTED ON NYSE
ICIC BANK’S ENTRY IN TO RURAL MARKET
Nature
Natureof
ofDemand
Demand Nature
Natureof
ofSupply
Supply

 Doorstep banking High cost of service delivery

Flexibility in timings Timings and procedures: Rigid
Timely availability of services and inflexible
Low value and high volume High transaction cost for the
transactions customers
Require
simple processes with Expansion of branch network
minimum documentation expensive and time taking
 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
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%
– 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%
BANKING WITH POOR IS CHALLENGING, AND
CONVENTIONAL BANKING WAS NOT POISED TO MEET
THESE DEMANDS.

HENCE BANK DECIDES TO WORK WITH MODELS WHICH

WOULD COMBINE THE STRENGTHS OF INTERMEDIARY
FORMS OF ORGANISATIONS WITH THE FINANCIAL
BANDWIDTH OF A BANKING INSTITUTION.
 MICRO FINANCE INITIATIVES

SHG-Bank Linkage Program

launched with ambitious targets
Govt
Govt//NABARD
NABARD  Nearly 1 mn SHGs promoted
 Rs.39 bn disbursement

Variety of models under

implementation with stress on
 Door step delivery of services
MFIs/NGO
MFIs/NGO  Professional management and
computerized systems
Bank-led Model for Self Help
Groups (SHGs)
 The SHG Bank linkage Model…
Structure
Structure Characteristics
Characteristics

 Public
PublicSector
Sectorbanks
banks
implementing Government
implementing Government
Bank
Bank schemes
schemes
 Poverty
Povertyeradication
eradication
 Financing
Financingfarmers
farmersand
and
small entrepreneurs
small entrepreneurs
Branch
Branch Emphasis
EmphasisononSHGs

SHGs
 Concept
Conceptpromoted
promotedby by
NABARD
NGO NABARD
 IImn
mnSHGs
SHGsfinanced
financed
 Innovative
InnovativePractices
Practices
SHG
SHG  Oriental
OrientalBank
Bank

•• Branches
Branches assess
assess credibility
credibility ofof individual
individual
SHG
SHG and
and monitor
monitor repayment
repayment processprocess
Group
Groupformation
formationbybyBank
BankororNGOs
NGOs
 SHG BANK LINKAGE MODEL

MERGED WITH BANK OF MADURA IN MAR’01

PROGRAMME IMPLEMENTED BY BOM WAS NOT

SUSTAINABLE

ICICI BANK DECIDE TO IMPROVE BY

IMPLEMENTING 3 TIER STRUCTURE
3 TIER STRUCTURE OF ICICI
BANK
Divisional Manager 20 Bank employees able
ICICI Bank to manage project
staff Project Manager

Outsourced Coordinators 1 Coordinator manages 6

staff (leaders of Promoters with each
old SHGs) Promoter forming &
Promoters managing 20 SHGs

Group of 20 poor
Community
SHGs women

thereby enabling increase in outreach from 1,200 SHGs to

more than 12,000 SHGs in 3 years
 ADVANTAGES OF LINKAGE MODEL

•No risk sharing of financial stake/performance stake of

intermediary (NGO) in group formation (responsibility of NGO
limited to group formation only).

•ICICI bank also involved Self Help Promotion Institutions &

outsourced the work of group formation to them in which case the
bank staff (Project Managers) were replaced by external entity.
But……
•There was still a need to control group formation and link it to
credit discipline.

•Despite all initiatives taken by the bank, the linkage model reached
a saturation point.
Bank led SHG banking was not
scalable
Limited outreach
Concentrated in urban areas

Existing High cost low ticket items

ExistingBranches
Branches
Cash intensive transaction
Transaction cost of 8-20%

High infrastructure costs

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

NEED OF MICRO FINANCE INSTITUTIONS INTERMEDIATION

WAS FELT
MFI INTERMEDIATION
MODEL
Clients
Clients
MFI
MFI
Extends
Extendsloan
loanto
toclients
clients
Create
Createcharge
chargeononcapital
capitalfor
forthe
the
loan
loanto
toclients
clients

Bank
Bank
Extends
Extendsloan
loanto
toMFIs
MFIs
Create
Createcharge
chargeononcapital
capitalfor
forthe
the
loan
loantotoMFI
MFI
 OPTIMIZING COSTS
Bank
BankCosts
Costs MFI
MFICosts
Costs

 Branch license – manpower  Branch license – not applicable

intensive process
 Staff Costs – at least 10 times
due to higher salary structure in
Commercial banks
 Larger overheads due to
centralized operations and larger
geographies covered
 Staff costs – substantially
lower due to hiring of local
manpower
 Considerably lower cost
structures due to local area
approach

LEADING TO A REDUCTION OF UPTO 6% IN TRANSACTION COSTS

 CONSTRAINTS OF MFII
MODEL
DOUBLE CHARGE ON CAPITAL CREATED – ONE WHEN BANK LENDS TO MFI &
2ND WHEN MFI LENDS TO THE CLIENT.

•MFIS COULD NOT GROW TO THE REQUIRED LEVEL DUE TO NON-

AVAILABILITY OF ADEQUATE CAPITAL AND OPERATION WITH LIMITED
DEBT FUNDING.

•LIMITED SCOPE FOR MFI FOR RAPID SCALE UP, IN THE ABSENCE OF EQUITY
INVESTERS.

•MFIS EXPOSED TO THE RISK OF LENDING TO END CLIENTS.

•AREA OF OPERATION OF MFI WAS LIMITED, RESULTING IN LARGER RISK.

•IF MFIS COLLAPSED DUE TO INTERNAL PROBLEMS, ENTIRE CLIENT

SEGMENT WILL DERAIL.

•THIS MODEL HAD COMPETENCIES OF THE BANK ON ONE SIDE & SOCIAL
INTERMEDIATION EXPERTISE OF THE MFI ON THE OTHER. THERE WAS A
NEED TO COMBINE STRENGTHS OF BOTH INSTITUTIONS AND ALSO BUILDING
IN CASH INCENTIVES & JUDICIOUS USE OF CAPITAL FOR MAXIMUM CLIENT
OUTREACH
 ISSUES
SHOULD ICICI MODIFY THEIR EXISTING
MODEL? IS A NEW STRUCTURE ALTOGETHER
REQUIRED
WHAT KIND OF STRUCTURE WOULD BE ABLE
TO USE CAPITAL PARSIMONIOUSLY AND BE
SCALABLE IN THE LONG RUN?
HOW COULD INCENTIVES FOR THE
ORIGINATOR OF THE PORTFOLIO(MFI) BE
STRUCTURED?
HOW CAN ICICI ENSURE THAT THE NEW
MODEL BE COMMERCIALLY VIABLE AND
INCENTIVIZE GROWTH?
SHOULD ICICI MODIFY THEIR EXISTING MODEL?
IS A NEW STRUCTURE ALTOGETHER REQUIRED

YES,
To separate the risk of the MFI from the risk inherent in the micro finance
portfolio.
To provide a mechanism for banks to incentivize partner MFIs
continuously, especially in a scenario where the borrower entered into a
contract directly with the bank and the role of the MFI was closer to
that of an agent.
To deal with the inability of MFIs to provide risk capital in large
amounts, which limits the advances from banks, despite a greater ability
of the latter to provide implicit capital.A model was needed to separate the
risk of the MFI from the risk inherent in the loan portfolio.
WHAT KIND OF STRUCTURE WOULD BE ABLE
TO USE CAPITAL PARSIMONIOUSLY AND BE
SCALABLE IN THE LONG RUN?
 HOW COULD INCENTIVES FOR THE
ORIGINATOR OF THE PORTFOLIO(MFI) BE
STRUCTURED?

THIS CAN BE DONE THROUGH SECURITISATION

HOW CAN ICICI ENSURE THAT THE NEW MODEL BE
COMMERCIALLY VIABLE AND INCENTIVIZE GROWTH?

THROUGH INTENSIVE MARKET DEVELOPMENT INITIATIVES ,

INNOVATIVE STRATEGIES AND RESEARCH .
 BY CREATING A SECONDARY MARKET IN INDIA FOR MICRO-
FINANCE RECEIVABLES
URBAN POVERTY NEEDS TO BE ADDRESSED
 OVER 300 COMMERCIAL AND CO-OPERATIVE BANKS WILLING
TO PURCHASE MICRO-FINANCE RECEIVABLES
 ICICI BANK IS WORKING WITH RATING AGENCIES FOR CREDIT
ENHANCING MICROFINANCE ASSETS FOR BETTER RATINGS
OFFERING INSURANCE AS A RISK MITIGANT TO TAKE CARE OF
CREDIT DEFAULTS