ICICI Bank in Micro-finance: Breaking the barriers

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ICICI Bank in Micro-finance Breaking the barriers
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Agenda
About ICICI Group
Micro-finance in India
ICICI Bank Micro-finance
Issues
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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 US500 mn

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Agenda
About ICICI Group
Micro-finance in India
ICICI Bank Micro-finance
Issues
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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

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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, VijayA framework for
building a sustainable rural financial system
(RFS) for India, BASIX, www.basixindia.com
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Banking with poor is challenging

• 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 Demand
Nature of Supply
and conventional banking was not poised to meet
these demands
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leading to new innovations in credit delivery
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Agenda
About ICICI Group
Micro-finance in India
ICICI Bank Micro-finance
Issues
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(No Transcript)
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The SHG Bank linkage Model
NGO

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

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was modified by ICICI Bank
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
• High cost low ticket items
• Cash intensive transaction
• Transaction cost of 8-20

Existing Branches

• High infrastructure costs
• High operating overheads
• Long gestation period
• Low technology usage in rural areas
• Transaction at branch costs US 1 vis-a-vis 25
  cent at ATM

New Branches
and we decided to look beyond our own network
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at channels of MFI lending
MFI Extends loan to clients Create charge on
capital for the loan to clients
Clients
Bank Extends loan to MFIs Create charge on
capital for the loan to MFI
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Optimising costs

• Branch licence manpower 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

• Branch licence not applicable
• Staff costs substantially lower due to hiring
  of local manpower
• Considerably lower cost structures due to local
  area approach

Bank Costs
MFI Costs
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
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 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