ICICI Bank in Micro-finance:

Breaking the barriers

 Agenda
About
AboutICICI
ICICIGroup
Group

Micro-finance
Micro-financein
inIndia
India

ICICI
ICICIBank
Bank&&Micro-finance
Micro-finance

Issues
Issues

2
 The ICICI Group today

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
Largest rural and micro loans provider in the country
Asset base of ~US$ 45 bn, PAT of about US$500 mn

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 Agenda
About
AboutICICI
ICICIGroup
Group

Micro-finance
Micro-financein
inIndia
India

ICICI
ICICIBank
Bank&&Micro-finance
Micro-finance

Issues…
Issues…

4
 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

5
 But large 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%
 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

6
 Banking with poor is challenging…

Nature
Natureof
ofDemand
Demand Nature
Natureof
ofSupply
Supply

 Doorstep banking High cost of service delivery

Flexibility in timings Timings and procedures: Rigid
Timely
and inflexible
availability of services
High transaction cost for the
Low value and high volume
customers
transactions
Expansion of branch network
Requiresimple processes with
expensive and time taking
minimum documentation

…and conventional banking was not poised to meet these

demands…

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 …leading to new innovations in credit
delivery
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

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 Agenda
About
AboutICICI
ICICIGroup
Group

Micro-finance
Micro-financein
inIndia
India

ICICI
ICICIBank
Bank&&Micro-finance
Micro-finance

Issues…
Issues…

9
 Bank-led Model for Self Help Groups (SHGs)

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 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
repaymentprocess
process
•• Group
Groupformation
formationbybyBank
BankororNGOs
NGOs
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 …was modified by 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

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 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

…and we decided to look beyond our own

network…
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 …at channels of MFI lending

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

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 Optimising costs…

Bank
BankCosts
Costs MFI
MFICosts
Costs

 Branch licence – manpower  Branch licence – not applicable

intensive process
 Staff Costs – at least 10 times
due to higher salary structure in
Commercial banks
 Larger overheads due to
centralised operations and larger
gegraphies 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…

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 But opening up new challenges…

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 due to size of balance sheet

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 …leading to the paradox…

Banking system capable of providing large

Banking
quantum of wholesale finance to the ultimate
System
clients

Grass-root agencies capable of providing

MFIs / NGOs origination and supervision support in a cost-
effective manner

A burgeoning segment with effective demand

Clients for finance

…of supply not being channelised to meet the

demand
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 Issues…

Need for structures 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 structures capable of massive scale up

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