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ICICI Bank in Micro-finance: Breaking the barriers

ICICI Bank in Micro-finance: Breaking the barriers. Nachiket Mor, Executive Director, ICICI Bank San Francisco, December 13, 2004. Agenda. About ICICI Group. What is Micro-finance. Micro-finance in India. ICICI Bank & Micro-finance. New Revolutionary Channels. Going Ahead.

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ICICI Bank in Micro-finance: Breaking the barriers

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  1. ICICI Bank in Micro-finance: Breaking the barriers Nachiket Mor, Executive Director, ICICI Bank San Francisco, December 13, 2004

  2. Agenda About ICICI Group What is Micro-finance Micro-finance in India ICICI Bank & Micro-finance New Revolutionary Channels Going Ahead

  3. The ICICI Group today Largest private sector bank in India Largest consumer credit provider in India Largest private sector life and general insurer in India Over 10 million retail customer accounts Building a global presence Asset base of Rs 1327.80 bn Profit after Tax of Rs 16.37 bn for FY04

  4. Multi-channel delivery model Call Centers m-Banking Branches Internet Banking ATMs Technology-enabled delivery • Successful migration to technology channels such as ATMs, Internet, mobile banking and call centers • Only 27% of transaction carried out at branches • ICICI Bank’s annual technology operating expense per customer estimated to be 5-10% of global banks

  5. Transforming channel usage Channel Share of transactions in March 2000 Share of transactions in May 2004 Branches 94% 27% ATMs 3% 46% Internet & mobile 2% 17% 1% Call centre 10% India’s largest online trading site with about 460,000 customers and 43% of NSE’s online trading volume

  6. Agenda About ICICI Bank What is Micro-finance Micro-finance in India ICICI Bank & Micro-finance New Revolutionary Channels Going Ahead

  7. What is micro finance… Savings Micro credit Insurance and Investments Transfer Payment • The provision of thrift, credit & other financial services of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards.

  8. Institutional micro-finance is important for poor people… Savings • Store excess liquidity for future use • Obtain returns on investments • Keep savings secure and confidential • Avoid negative returns on savings Credit • Expand and diversify enterprises • Helps to reduce risk, improve management, raise productivity • Lower cost than credit from informal moneylenders • Helps increase household income …and helps smoothen cash flows across time

  9. Agenda About ICICI Bank What is Micro-finance Micro-finance in India ICICI Bank & Micro-finance New Revolutionary Channels Going Ahead

  10. 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

  11. But large gaps persist in reaching out 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, Vijay”A framework for building a sustainable rural financial system (RFS) for India”, BASIX, www.basixindia.com

  12. 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 Banking with the poor is challenging… Customer needs Present status …and conventional banking may not be poised to meet these demands

  13. Agenda About ICICI Bank What is Micro-finance Micro-finance in India ICICI Bank & Micro-finance New Revolutionary Channels Going Ahead

  14. Identification of potential growth areas… Urban Markets LowIncomeMarkets • Urban India is a third of Indian population • Urban Middle to High income segment is highly competitive • Buyers’ market • Underserved market of 741 million • Credit demand estimated at Rs.450.0 billion • Tremendous potential for all financial services …provided compelling reasons to look at low income clients

  15. Profitable business opportunities exist… Market size and potential of low income clients Vision To be the largest provider of financial services in India with a ubiquitous presence; while becoming the major banking sector partner in impacting the economic development process in the country Low delinquency in pilot phase Stepping stone to the entire rural market Creating bigger customers for future …setting the path for scale up

  16. An innovative strategy was evolved… Conventional Rural Banking Manpower intensive Channel driven Single Product focus Branch based Our strategy Technology intensive Customer driven Multiple Product approach Entrepreneur based

  17. Franchisees MFIs Kiosks Corporates For unraveling the Bottom of the Pyramid (BOP) Rich/ SME Low Income Middle Class …through the right channels * Micro Finance Institutions

  18. Agenda About ICICI Bank What is Micro-finance Micro-finance in India ICICI Bank & Micro-finance New Revolutionary Channels Going Ahead

  19. Micro Finance Institutions

  20. SHG-Bank Linkage Bank-MFI Linkage Bank Bank Branch MFI NGO Ind./SHG/JLG SHG • Branches assess credibility of individual SHG and monitor repayment process • Group formation by NGOs • Bank on lends to MFIs based on their capital Existing micro finance models lacked scalability

  21. New structures were required… …which would leverage pre existing networks • ICICI Bank realises the potential of the numerous MFIs and NGOs working in different regions of the country • Leveraging their potential may be the solution for expanding in new areas rather than expanding own network • ICICI Bank has been providing Term Loans to MFIs but scale is limited due to the risk absorption capacity of the MFIs

  22. Partnership Model: Joining Hands to Scale up

  23. Traditional Model of lending to MFIs… MFI Extends loan to clients Create charge on capital for the loan to clients Clients • 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 Bank Extends loan to MFIs Create charge on capital for the loan to MFI

  24. …Led to the paradox… Banking System Banking system capable of providing large quantum of wholesale finance to the ultimate clients MFIs / NGOs Grass-root agencies capable of providing origination and supervision support in a cost-effective manner Clients A burgeoning segment with effective demand for finance …of supply being a small fraction of demand for finance

  25. We decided to resolve the paradox… Need for a structure 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 information management …through a structure that is capable of massive scaling up

  26. Banks MFIs …And evolved the Partnership Model • Provider of loan funds, 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 • Undertakes loan origination, 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

  27. Model 1 ROI payable Lends 100 Mobilises clients Bank NGO Clients Not constrained by NGO b/s Capital allocation Against UL On 100 No liability No consideration Efficient use of capital Y Incentive alignment N

  28. Model 2 MFI ROI+service fee ROI On-lends 100 Bank Lends 100 Clients Capital Allocation on 100 r.t MFI rating Capital Allocation r.t UL on 100 s.t constraint of capital on MFI b/s Efficient use of capital N Incentive alignment Y

  29. Partnership Model MFI Applicable ROI Lends 100 Service fee Clients Bank Commitment fee on OD and penal rate in the EoD Origination & supervision not constrained by MFI b/s K allocation Against Portfolio (100) and OD limit to MFI (x% of 100) Provides OD limit as a % of 100 advanced Efficient use of capital Y Incentive alignment Y OD limit provides MFI the ability to share risk & catalyse lending without corresponding increases in its equity capital

  30. The Partnership Model–key differentiators • Intermediary assumes fraction of the credit risk (to the extent of risk sharing), leading to reduction in capital required • Bank prices on basis of underlying asset rather than rating of intermediary • Transition from ‘lending to organisation’ to ‘asset-based lending’ • ROE of intermediary significantly improves with portfolio quality remaining unchanged • Scope for leverage of 10-12 times compared to 2-3 times previously

  31. Partnership Model: A Win-Win proposition • Marries the core competence of NGOs/MFIs with that of banks • Social mobilization skills with finance • Lending directly to the borrowers through innovative channels • Model overcomes constraints of • NGOs: Complete dependence on donor funding • MFIs: Capital Adequacy requirements A sustainable solution for Micro-finance

  32. Securitization: Creating a Secondary Market for Micro-finance

  33. Structure Securitization • 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 • 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 Credit Enhancement

  34. Enablers Securitization: Pricing • Advantage of differentiating between the financial and operational risk of the MFI • Credit Enhancement improves rating of portfolio and enables a highly competitive pricing • Past portfolio performance and expected loss rates • Quality of the governance, management, operating and management information systems of the MFI Parameters

  35. On-tap securitization • ICICI Bank provides the MFI an Advance Purchase Consideration Limit with which the MFI can build assets • Once created assets are assigned to ICICI Bank • MFI can continue to build assets and assign to ICICI Bank on a a regular basis MFIs are able to scale up their outreach while maintaining a healthy debt-equity ratio

  36. Showing the way… • Potential of creating a large secondary market in India for micro-finance receivables • Over 300 commercial and co-operative banks with substantial ‘priority sector’ requirements • Mutual Funds perceiving the assets as AAA securities • Bonds may be issued against the securitized assets of micro-finance ….by creating linkages for MFIs to capital markets

  37. Sectoral initiatives to deepen the market • 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 sector The entity would provide quasi equity, credit wraps and technical & financial services to MFIs

  38. 8,781 Villages covered 39,740 Groups financed 456,712 No of Clients ICICI’s achievements in this field… Particulars SHG / JLG position Sep ‘04 …made possible through wide acceptance of the new models by MFIs

  39. 920,000 900000 800000 700000 600000 500000 400000 300000 244,570 200000 175,390 Number of clients 72,980 100000 Mar’02 Mar’03 Mar’04 Mar’05 …and commitment to scale up!

  40. Developing synergies through Corporate Partnerships…

  41. Exploring Micro-Credit with Corporates… • Working closely with the Corporate / its Foundation • Low wage employees /contract labourers remain uncovered by formal banking channels • Large village communities existing near corporates establishments • Self Help Groups Corporate Employees Corporate Foundation

  42. GIVE Foundation ICICI Bank Corporate • Corporate philanthropy services acts as advisor in process • Facilitates relationship between company and NGO • Helps build detailed implementation plan and budget • Provides developmental expertise • Recommends proven intervention strategies • Identifies NGOs to serve as resource partners • Can provide credit for micro-financial services • Funds the program at their chosen location • Builds capacity in their organization to manage program on an ongoing basis • Scales up over time to increase impact …Implemented Through a Partnership

  43. Provide access to Beneficiary Microcredit SHG Kiosks Low Wage labour Housing Loan Contract Labourers Household assets Educated Unemployed 2 wheeler loans Insurance Entrepreneurs In summary… Corporate Partnership

  44. Internet Kiosks Bridging digital divide through…

  45. And creating an alternate channel… Desire to reach audiences not accessible through Micro finance Lower cost of setup Faster pace of outreach Internet Kiosks – Harnessing technology for rural reach

  46. Internet Kiosk Internet Kiosks… Connectivity • Kiosk Operator: • Entrepreneur • Provides commercial services Multimedia PC with Power backup • STD/PCO: • Enabling voice communication Printer & Other Accessories : Enabling desk top publishing and other similar work Connects rural India to the world

  47. Concept of a kiosk Shared Services Point • Includes village economy in the services distribution • Enhances local economy’s access to financial services • Financial viability achieved at reasonable cost to consumer • Set up in partnership with Government, NGOs, Corporate Entrepreneur driven model • Invests some capital in the business • Functions as the ICICI Bank Franchisee in the village • Delivery of Financial as well as non-Financial services

  48. Savings and Remittances Life & General Insurance Stocks, Bonds and MFs Credit Commodity Derivatives Payment Gateway Agri-Extension Tele-medicine Education E-Governance Communications Entertainment Kiosks can offer financial services Financial Products Non Financial Products as well as non-financial (partner services)

  49. The drivers of Rural Internet Kiosks The film entrepreneurs & multi-service delivery

  50. Challenges faced • Unfamiliarity with products • New channel Customer • Unfamiliarity with computers • No experience in managing business • Insufficient funds to start business Entrepreneur • Inadequate products & services • No Internet Connectivity • New backend required Process and how they were resolved

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