Microfinance & ICICI Bank

June 2007

Agenda

Microfinance: An Overview Microfinance Institutions (MFIs) Financial Intermediation Models Way Forward

domestics and unemployed workers Very Poor People who have few (if any) assets ± very limited chances to earn money savings Laboring Poor Very Poor The Poverty Pyramid The need of customer is more than credit«. Self-Employed Poor Poor people who are meeting their basic needs by running microbusinesses Laboring Poor Farm laborers. *Source: FINCA¶s Poverty Pyramid .Microfinance vs Microlending ³Poor people borrow some of the time but save all of the time´ credit Entrepreneurial Poor Self Employed Poor insurance Entrepreneurial Poor People who are slightly below the poverty line.

high volume transactions ‡ High Transaction Costs (8-20%) ‡ Low use of technology ‡ High supervision costs ‡ High cash handling costs Provision of microfinance is constrained by« Poorly functioning Markets Regulatory Issues Staff Incentives within organisations not aligned to maximise access to financial services for poor .Constraints to scaling Information Asymmetry ‡ Inability of the poor to offer collateral ‡ No credit history available ‡ Potential success of enterprises difficult to evaluate High Costs of Intermediation ‡ Low value.

Agenda Microfinance: An Overview Microfinance Institutions (MFIs) MFIs ± Financial Intermediation Models Way Forward .

Societies .NBFCs . not for profits .Trusts .Section 25.under NABARD¶s SHG Bank linkage Cooperatives/MACs/federations Typical MicroFinance Institutions (MFIs) following various delivery (i) Group delivery models .JLGs (ii) Individual banking (iii) Adaptations of above Registered as .Microfinance Institutions (MFIs) Multiservice NGOs & SHPIs .Others .SHGs .

Model Affinity group of 10-20 members Weekly group meetings Leader elected by group members Small and regular savings Group has a savings bank account operated by group representative  Internal lending to members from own savings  External loan to the Group as a whole  Disbursement of loans to members at the discretion of group      .Self Help Group (SHG) .

Hyderabad .Joint Liability Group (JLG) ± Grameen Model 5 member Joint liability Groups 40 member centers Weekly group meetings Established methodology for  Client screening  Group recognition  Loan sanctioning  Collections  Collections enforced through  Joint liability  Peer pressure  One time membership fee     *Photograph: Swayam Krushi Sangam.

Agenda Microfinance: An Overview Microfinance Institutions (MFIs) MFIs ± Financial Intermediation Models Way Forward .

Traditional models lack scalability« SHG-Bank Linkage Bank Bank-MFI Linkage Bank Branch NGO SHG MFI Ind./SHG/JLG ‡ Bank on lends to MFIs based ‡ Branches assess credibility of on their capital each SHG and monitor repayment process ‡ Group formation by NGOs .

monitoring and collection  MFI provided OD limit by Bank equivalent to amount of risk sharing. which is drawn in event of default upto specified limit  Transfer of economic capital from Bank to MFI Structure separates risk of the MFI from risk of the portfolio . mezzanine equity and technology  Lends directly to clients with risk-sharing by NGO/MFI  Decides pricing and risk sharing by NGO/MFI based on historical data MFIs  Undertakes loan origination.Hence. the ICICI Bank Partnership ICICI Bank  Provider of loan funds.

Moving on ± Buyouts:  ICICI Bank identifies portfolio based on fulfillment of minimum criteria and past portfolio performance  MFI continues to collect receivables from the borrowers  MFI equity leverage reduced enabling it to originate further assets Structure Credit Enhancement  MFI provides ICICI a credit enhancement in the form of a FLDG  FLDG is based on expected losses in the loan portfolio  Detailed study of past portfolio data conducted to arrive at expected loss rates .

Agenda Microfinance: An Overview Microfinance Institutions (MFIs) MFIs ± Financial Intermediation Models Way Forward .

of MFIs Economically Vibrant High micro credit penetration .Large geographic asymmetries exist« Very Few MFIs Economically Backward Low level of micro credit penetration «Requires reduction of geographic asymmetries and increasing depth of outreach« 14 Large no.

..The Universe. Different resources required at different stages .

Building Blocks«. Capital Funds Model MFI Training Technology Manpower .

. ALM .. Funds and Capital ± through Banks and VCs  Technology ± Leveraging the developments  Human Resources  Training and Capacity Building for nascent MFIs  Manpower Requirement for bigger MFIs   Knowledge and Information  Mentoring on advanced financial instruments eg: Treasury Operations.The Resources Required.

Finance ± bringing in risk equity Take out finance model  Initial investment by venture capitalists ± start ups.ICICI Bank provides long term debt (quasi equity) to MFI to free up initial investments Guarantees leveraged     Performance guarantees from corporates / banks Guarantees leveraged ± 3 to 4 times Business planning and monitoring throughout the loan period Documentation support to MFIs 18 .  Tie up with local venture capital firms. On-lending funds available from ICICI Bank for building portfolio  Exit route .

credit The entity enhancement and technical & financial services to MFIs 19 .Finance ± access to secondary markets  Creating intermediary Financial Institution to provide assistance to Indian MFIs  Enabling access of MFIs to mainstream capital/ debt markets  Enhance resource flows from commercial banking provides sector quasi equity.

And supporting systems« Operational processes  Data recording system for start up MFIs  Business process re-engineering for mature MFIs  Internal control and auditing systems for multi-branch operations  Cash flow management Technology     Microbanking solution FINO Automation through card based solutions / handhelds Evolution of banking interface of MFIs 20 .

local institutes for specific course in MF  Content development  Tie up with institutes like NIIT and APTECH for FINO training Building a pipeline 21 .Human Resources« Lateral  Microfinancejobs.com  Head hunters for senior level recruitment Fresh passouts  Campus recruitments from institutions in MFI command area  Induction into MFI operations  Working with Universities.

Enhancing Skills« Staff Skills      Client assessment Accounting and financial analysis Management of information Process flow and monitoring Internal control Product development  Market research  Client needs assessment and hybrid product design 22 .

collaboration with international universities  Advance financial training for senior management of MFIs  Integrated support structure under IFMR Trust Initiatives promoting long term sectoral growth« 23 .Building Capacities« Mentoring  Corporate governance ± ICICI Bank volunteering  Centre for Microfinance Research  Impact assesment  Innovative products  Research .

Savings and Remittances To provide these services there is a need to have a:   A clear understanding of the CUSTOMER and Technology that enables the delivery CHANNEL .Beyond Microcredit    Need for Diversification in the sector Microcredit just the starting point Larger suite of financial services .Insurance.

Thank you 25 .

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