ICICI Bank - Innovations in Microfinance

Abstract:
The case describes microfinance initiatives of ICICI Bank, the largest private sector bank
in India. In spite of being a new entrant, ICICI Bank has been highly successful in the
microfinance sector, primarily because of its innovative microfinance business models.
The case discusses some of these models including Bank led & Partnership model. Other
microfinance ventures of ICICI Bank are also explained in detail.
The case presents how ICICI Bank has made microfinance a viable business proposition
for banks.

Issues:
Business models of Microfinance, how to make microfinance a viable business option
ICICI Bank is one bank that has developed a very clear strategy to expand the provision of
financial products and services to the poor in India as a profitable activity." 1
- Haruhiko Kuroda, President, Asian Development Bank. 2

Forays in Microfinance
Lakshmi, a 22-year-old school dropout, lived in a remote village of Tamil Nadu. Instead of
getting married and starting a family like any other village girl of her age in India, she
wanted to set up on her own business.

Lakshmi started an Internet kiosk in her village, offering services like e-mail, Internet chat
and tips on health and education. The kiosk was partially financed by ICICI Bank and was
set up in association with n-Logue Communications. 3 Latha, a 29-year-old married woman
with three children borrowed Rs.18,000 to set up a small provision store in Kothaipalli, a small

village, in the north of Andhra Pradesh. Within a year, she started earning Rs.3,500 a month from the
store. With this money, she was able to provide her children a good education at a local private school.
She was a part of a self help group in Andhra Pradesh which received financial assistance from ICICI
Bank. These are real-life examples to illustrate how the micro-lending initiatives of ICICI Bank affected
the lives of poor women in India.

By becoming a part of self-help groups, several rural women were able to move out of poverty. Apart

from financial benefits, the initiatives helped the women to develop self confidence, improve their
communication skills and raise their position in society.
In India, 400 million people spread across more than six million villages are estimated to be in need of
micro-financing. The organized financial sector caters to the need of about 20 million people. ICICI
Bank's micro credit initiatives involved lending small amounts to the people below poverty line. It
provided basic banking services like savings and withdrawal along with micro-investment products like
mutual funds.
This provided poor people with safer avenues for saving with little volatility. ICICI Bank was also
instrumental in designing new structures through which microfinance institutions (MFIs) and nongovernmental organizations (NGOs) could overcome capital constraints and expand their reach...

The structures included buying the microfinance portfolios of MFIs either on a selective
basis or buying the complete loans of a branch or a particular area, and also entering into
partnership arrangements with MFIs. This helped in leveraging the operational strength of
NGO/MFI with the financial strength of ICICI Bank. In the world's largest securitization 4
deal, ICICI Bank purchased a portfolio of 42500 loans worth US$ 4.3 million from Share
Microfin Limited in 20045...

Background Note
In March 2004, the cumulative disbursements to SHGs stood at Rs.39 billion. 6 According to
industry experts, the demand for microfinance in India was estimated at about Rs.300
billion . This meant there was a huge unmet gap between demand and supply.
In the past, high demand and low supply of micro-credit was blamed on the limited efforts
of major Indian financial institutions to reach the poor. Banks considered small loans as a
statutory obligation rather than a business opportunity. Mainstream financial institutions
considered these loans as ones that were difficult to recover, unprofitable and involving
high transaction costs.

These loans were perceived to carry high risk as they had high default rates; the borrowers
usually did not have any viable income generating opportunities nor did they possess any
collateral guarantee.

To fill the huge gap between demand and supply, an environment that was conducive for
microfinance providers was required. ICICI Bank was promoted in the year 1994 as the
banking division of Industrial Credit and Investment Corporation of India Limited (ICICI).
ICICI was a developmental financial institution incorporated in the year 1955, as a joint
initiative of Government of India, the World Bank and representatives of the Indian

industry.
By the 1990s, ICICI had emerged as a diversified financial group that offered a wide
range of financial products through a network of subsidiaries and affiliates. In April 2002,
ICICI merged with ICICI Bank...

Bank Led Model

The bank led model was derived from the SHG-Bank linkage program of NABARD. Through
this program, banks financed Self Help Groups (SHGs) which had been promoted by NGOs
and government agencies.

ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG
program. However, rather than spending time in developing rural infrastructure of
its own, in 2000, ICICI Bank announced merger of Bank of Madura (BoM), which had
significant presence in the rural areas of South India, especially Tamil Nadu, with a
customer base of 1.2 million and 77 branches.
Bank of Madura's SHG development program was initiated in 1995. Through this
program, it had formed, trained and initiated small groups of women to undertake
financial activities like banking, saving and lending. By 2000, it had created around
1200 SHGs across Tamil Nadu and provided credit to them...

Partnership Model
The SHG program had been fairly successful in several states of India, but the reach was
limited only to those areas where the bank's branches were operational. The partnership
model of ICICI Bank aimed at reaching those areas where the bank did not have any
branches.

This model aimed at synergizing the comparative advantages and financial strength of
the bank with social intermediation, mobilization power and infrastructure of MFIs and
NGOs. Through this model, ICICI Bank could save on the initial costs of developing rural
infrastructure and micro credit distribution channels and could take advantage of the
expertise of these institutions in rural areas. Initially, ICICI Bank started off by lending to
MFIs and NGOs in order to provide the necessary financial support to their activities.
Later, ICICI Bank came up with a plan where the NGO/MFI continued to promote their
microfinance schemes, while the bank met the financial requirements of the borrowers...

Other Microfinance Initiatives

As a part of microfinance initiatives in the agriculture sector, ICICI Bank developed Farmer
Service Centers (FSC). An FSC was managed by an agricultural input supply company
which supplied inputs like seeds and technical knowhow to the farmers.

FSCs were also managed by an extension service organization which provided inputs,
credit and technology or by an NGO that provided all the services that farmers needed for
their agricultural needs. Working in close association with farmers, FSCs provided them
with services like advice on seeds, sowing techniques, pest control, weed control, usage
and dosage of herbicides, pesticides and fertilizers and other services associated with
agriculture. The FSCs also provided crop-related information and services to farmers,
apart from facilitating the sale of agricultural produce. The FSCs arranged to procure the
produce through agents and sold it in organized agricultural markets thus getting better
realization...

The Future
ICICI Bank plans to use the services of over 100,000 agents for its various microfinance
initiatives. The bank has encouraged direct sales agents to market microfinance products
into rural areas.

These agents contact several borrowers, thus expanding the reach of ICICI Bank at a low
cost. Taking the FSC initiative further, ICICI Bank plans to provide farmers credit from sugar
companies, seed companies, dairy companies, NGOs, micro-credit institutions and food
processing industries.
SIG has been involved in a project in the southern state of Tamil Nadu to find out how
wireless technology can be applied in the development of low cost models of banking.
Another plan to increase the reach in rural areas is to launch mobile ATM services. ICICI
Bank branded trucks have started carrying ATMs through a number of villages...