in Micro-financein Micro-finance

ICICI BANKICICI BANK

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 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.

Contd..

INTRODUCTION TO ICICI INTRODUCTION TO ICICI BANK 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

Doorstep banking

Flexibility in timings

Timely availability of services

Low value and high volume transactions

Require simple processes with minimum documentation

High cost of service delivery

Timings and procedures: Rigid and inflexible

High transaction cost for the customers

Expansion of branch network expensive and time taking

Nature of DemandNature of Demand Nature of SupplyNature of Supply

Indian banking system has achieved a formidable Indian banking system has achieved a formidable outreach in rural areasoutreach in rural areas

49% (32,538) of all scheduled commercial bank 49% (32,538) of all scheduled commercial bank branches are rural branches are rural

31% (131.1 million) of the total deposit accounts are in 31% (131.1 million) of the total deposit accounts are in rural Indiarural India

43%(22.4 million) of total credit accounts are in rural 43%(22.4 million) of total credit accounts are in rural IndiaIndia

Number of people per branch has reduced from 64,000 Number of people per branch has reduced from 64,000 in June 1969 to 15,000 in June 1997 (all India average)in June 1969 to 15,000 in June 1997 (all India average)

Source: Source:

BSR, March 31, 2001, Table 1.3, RBIBSR, March 31, 2001, Table 1.3, RBI

Deolalkar, G.H., “The Indian Banking Sector: On the road to progress”, A Study Deolalkar, G.H., “The Indian Banking Sector: On the road to progress”, A Study of Financial Marketsof Financial Markets

RURAL BANKING IN INDIA: RURAL BANKING IN INDIA: PROGRESS MADEPROGRESS MADE

For the rural population of 741.0 millionFor the rural population of 741.0 million– Population per branch: 22,793Population per branch: 22,793– Penetration of savings accounts is below 18%Penetration of savings accounts is below 18%– Number of villages per branch: 19Number of villages per branch: 19

High dependence on informal sourcesHigh dependence on informal sources– 36% of rural credit from informal sources36% of rural credit from informal sources– Dependence even higher for lower income Dependence even higher for lower income

households: 78%households: 78%

GAPS PERSIST IN OUTREACH TO GAPS PERSIST IN OUTREACH TO THE POORTHE POOR

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

MFIs/NGOMFIs/NGO

Variety of models under implementation with stress on Door step delivery of

services Professional

management and computerized systems

Govt / NABARDGovt / NABARD

SHG-Bank Linkage Program launched with ambitious targets Nearly 1 mn SHGs

promoted Rs.39 bn disbursement

Bank-led Model for Self Help Bank-led Model for Self Help Groups (SHGs)Groups (SHGs)

The SHG Bank linkage Model…The SHG Bank linkage Model…StructureStructure

BankBank

SHGSHG

BranchBranch

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

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

NGO

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

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

CharacteristicsCharacteristics

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

SHG BANK LINKAGE MODEL

Divisional Manager

Project Manager

Coordinators

Promoters

20 Bank employees able to manage project

1 Coordinator manages 6 Promoters with each Promoter forming & managing 20 SHGs

ICICI Bank staff

Outsourced staff (leaders of old SHGs)

SHGsCommunity Group of 20 poor

women

3 TIER STRUCTURE OF ICICI 3 TIER STRUCTURE OF ICICI BANKBANK

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.

High infrastructure costsHigh operating overheadsLong gestation periodLow technology usage in rural areas

Transaction at branch costs US$ 1 vis-a-vis 25 cent at ATM

Limited outreachConcentrated in urban areasHigh cost low ticket itemsCash intensive transaction

Transaction cost of 8-20%

Existing Branches

Existing Branches

New BranchesNew Branches

Bank led SHG banking was not Bank led SHG banking was not scalablescalable

NEED OF MICRO FINANCE INSTITUTIONS INTERMEDIATION WAS FELT

Bank

Extends loan to MFIs

Create charge on capital for the loan to MFI

Bank

Extends loan to MFIs

Create charge on capital for the loan to MFI

MFI

Extends loan to clients

Create charge on capital for the loan to clients

MFI

Extends loan to clients

Create charge on capital for the loan to clients

ClientsClients

MFI INTERMEDIATION MFI INTERMEDIATION MODELMODEL

OPTIMIZING COSTSOPTIMIZING COSTS

Branch license – manpower 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

Branch license – not applicable

Staff costs – substantially lower due to hiring of local manpower

Considerably lower cost structures due to local area approach

Bank CostsBank Costs MFI CostsMFI Costs

LEADING TO A REDUCTION OF UPTO 6% IN TRANSACTION COSTS

CONSTRAINTS OF MFII CONSTRAINTS OF MFII MODEL 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

ISSUESISSUES

SHOULD ICICI MODIFY THEIR EXISTING SHOULD ICICI MODIFY THEIR EXISTING MODEL? IS A NEW STRUCTURE ALTOGETHER MODEL? IS A NEW STRUCTURE ALTOGETHER REQUIREDREQUIRED

WHAT KIND OF STRUCTURE WOULD BE ABLE WHAT KIND OF STRUCTURE WOULD BE ABLE TO USE CAPITAL PARSIMONIOUSLY AND BE TO USE CAPITAL PARSIMONIOUSLY AND BE SCALABLE IN THE LONG RUN?SCALABLE IN THE LONG RUN?

HOW COULD INCENTIVES FOR THE HOW COULD INCENTIVES FOR THE ORIGINATOR OF THE PORTFOLIO(MFI) BE ORIGINATOR OF THE PORTFOLIO(MFI) BE STRUCTURED?STRUCTURED?

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

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.

SHOULD ICICI MODIFY THEIR EXISTING MODEL?IS A NEW STRUCTURE ALTOGETHER REQUIRED

WHAT KIND OF STRUCTURE WOULD BE ABLETO 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