ICICI Bank in Micro-finance: Breaking the barriers

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
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 Banks annual technology operating expense
  per customer estimated to be 5-10 of global
  banks

5
Transforming channel usage
Share of transactions in March 2000
Channel
Share of transactions in May 2004
94
Branches
27
3
ATMs
46
2
Internet mobile
17
Call centre
1
10
Indias largest online trading site with about
460,000 customers and 43 of NSEs 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

• Credit
• Expand and diversify enterprises
• Helps to reduce risk, improve management, raise
  productivity
• Lower cost than credit from informal moneylenders
• Helps increase household income

• Savings
• Store excess liquidity for future use
• Obtain returns on investments
• Keep savings secure and confidential
• Avoid negative returns on savings

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, VijayA framework for
building a sustainable rural financial system
(RFS) for India, BASIX, www.basixindia.com
12
Banking with the 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

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
Low Income Markets

• 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
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
Existing micro finance models lacked scalability
21
which would leverage pre existing networks
New structures were required

• 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
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
Clients
Bank
NGO
Not constrained by NGO b/s
No liability
No consideration
Capital allocation Against UL On 100
Efficient use of capital Y Incentive alignment
N
28
Model 2
ROIservice fee
ROI
On-lends 100
Clients
Bank

• MFI

Lends 100
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
Applicable ROI
Lends 100
Clients
Service fee
Bank

• MFI

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 Modelkey 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
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
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
ICICIs achievements in this field
Particulars
SHG / JLG position Sep 04
made possible through wide acceptance of the new
models by MFIs
39
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
to make a difference
Support SHGs formed by the corporate
Create loyalty with the low wage workers
Complement the corporates philanthropic
initiatives
43
Implemented Through a Partnership
44
In summary
Corporate Partnership
45
Internet Kiosks
Bridging digital divide through
46
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
47
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
48
Concept of a kiosk

• Shared Services Point
• Includes village economy in the services
  distribution
• Enhances local economys 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

49
Kiosks can offer financial services

• Savings and Remittances
• Life General Insurance
• Stocks, Bonds and MFs
• Credit
• Commodity Derivatives
• Payment Gateway

• Agri-Extension
• Tele-medicine
• Education
• E-Governance
• Communications
• Entertainment

Financial Products
Non Financial Products
as well as non-financial (partner services)
50
The drivers of Rural Internet Kiosks
The film
entrepreneurs multi-service delivery
51
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
52
Learnings from the channel

• Prefer convenience of Kiosks
• Demand for high value products

Customer

• Success contingent on Entrepreneur
• Sustained marketing, sales support crucial

Entrepreneur

• Implementation partners buy-in essential
• Connectivity is the key

Process
Service and convenience wins hands down
53
Implications for future

• Financial advisory services
• Credit history available

Customer

• Over 10,000 kiosks over the next year
• Our services will be offered in 2000

Network

• Extends outreach at low cost
• Individual lending models
• New products remittance linked credit

Microfinance
convenience, flexibility, a complete financial
solution
54
ICICI Banks kiosk network is increasing
Kiosks offer low cost distribution
capabilities for our products and services,
reaching out to the rural population
55
Credit franchisee- adapting structured finance
for rural segment
56
and meeting complete financial needs
Moving beyond credit
Disability
Framework by Accion
57
Through comprehensive product suite
Insurance (Ins) Life and General
Investments Mutual Funds designed for Rural
Channels
Accident Ins
Tractor Ins
Kiosks
Life Ins
Micro Finance
Weather Ins
Home Ins
58
Offering weather insurance for losses due to
vagaries of weather

• Nature of losses
• Production loss
• Revenue loss
• Asset loss
• Loss of livelihood

• Parameters Covered
• Precipitation
• Rain
• Snow
• Hail
• Temperature
• Wind
• Sunshine

Cover is provided for deviations from the optimum
range required
59
Critical Illness An innovation for BOP

• Major concern at time of illness loss of
  immediate income rather than cure
• Cure not even mandatory in all cases
• Kidney failure continue to operate on one
  kidney
• However convalescence period means zero income -
  disaster in a rural, non savings oriented society
• Product tides family over this crisis by
  providing financial support during this period
• Payout made on mere diagnosis and does not
  require money to be spent on treatment
• Traditional health product allowing treatment
  also available for higher cost

60
Securing rural lives through Insurance
General Insurance
62.5 mn rural customers insured by ICICI Lombard
covering mainly Personal accident as well as
emerging products such as Weather and Health
Insurance
Life Insurance
0.2 mn members of Micro-credit Foundation of
India covered by ICICI Pru/ ICICI Lombard
61
Agenda
About ICICI Bank
What is Micro-finance
Micro-finance in India
ICICI Bank Micro-finance
New Revolutionary Channels
Going Ahead
62
Scaling up access to BOP markets

• Very Few MFIs
• Economically Backward
• Low level of micro credit
• penetration

• Large no. of MFIs
• Economically Vibrant
• High micro credit
• penetration

Requires reduction of geographic asymmetries
and increasing depth of outreach
63
And meeting finance needs of urban India also

• Indias urban population is 285 million
• 27.8 of Indias population is in urban areas
• 11 of worlds urban population is in India
• 3 of the 10 largest cities in the world are
  located in India
• 35 cities have population of more than one
  million each
• Urban poor increased from 60 to 76 mn during
  1974-94

64
Scaling up would require exploring new horizons
Technological innovation
Productivity Frontier (Financial and
technological innovation)
Allied Interventions
Multiple delivery channels
Limited services to limited customers
Credit Bureau
65
Establishing Credit Bureaus

• Maintains individual client histories
• Credit decision based on scoring models risk
  based lending
• Moving from group based lending to individual
  based lending model
• Tracking clients through life cycle and offering
  customised solutions to meet life cycle needs

would enable systematic expansion and deepening
of the BOP markets
66
Pollinating the countryside with entrepreneurs
Identification of potential entrepreneurs
willing to partner with ICICI Bank
Entrepreneurs
Training
Training the entrepreneur on processes and
assessing their capabilities
Infrastructure
Providing funds, know how support for
initiating operations
Processes
Putting in place a fool proof system robust
processes for service delivery
Service Delivery
Providing the entrepreneur technical
financial support for delivering service
for establishing MFIs, kiosks or becoming
franchises in order to expand outreach to under
served areas
67
Implementing hybrid agent-linked models

• Lack of bank branches
• No incentive to increase outreach
• Customer perspective
• Unable to fulfill KYC guidelines
• Need for interacting with multiple
  
  
  
  institutions

Need

• Uncoupling of bank and front-line service
  operations
• Appointing authorized agents
• Opening accounts through agents
• Enabling (card-based) transactions through
  agents, merchant outlets, ATMs

Vision
68
To provide universal access to finance
Regulator support required for implementing the
pilot project
69
Allied Interventions Mass Retailing
Company
MFI

• Piggy rides on the MFIs distribution channel
• Ability to customise products
• Cost effective reach to the under served segments
  of society

• Procures bulk goods and commodities from
  companies at discount
• Bundles with micro loans to members
• Transforms into a logistic agency

MFI becomes a channelising agency for
distribution of all kinds of goods and services
required by the members
70
Allied Interventions Livestock Productivity
Majority of micro loans are for purchase of
livestock
Facilitation

• Facilitating fodder availability
• Sourcing high yielding breed
• Co-ordination for artifical insemination
• Training for selection of good breeds

ICICI Bank Ltd.
NDDB
Extension
Spandana
71
Allied Interventions -- Nutrition

• Integrating microfinance with nutritional
  communication / interventions could lead to
  improved health outcomes for the community
• Presence of over 1 mn micro finance groups of
  women provides an opportunity for focussed
  behavior change communication vis-à-vis nutrition
  practices

72
Leveraging technology to reduce transaction costs

• Reducing the cost of cash handling
• Supporting development of a Low Cost ATM will
  cost around 1000
• Use of Internet banking
• Exploring the use of mobile phone/card-based
  technologies
• Tobacco Board Case

73
The Road Ahead
40 million clients

• Leveraging strong delivery capabilities to
  provide all financial services like insurance,
  savings, micro-investments, etc to the BOP
  markets

630,000 villages
40,000 internet kiosks
1000 Franchises
200 MFI partners
74
Towards a larger dream

• Buy - out of loan portfolios of MFIs
• On tap securitisation of loan portfolios
• Partnership with MFIs/NGOs to deliver micro
  credit
• Kiosks
• Franchises

• Leveraging strong delivery capabilities to
  provide other services like insurance, savings,
  micro-investments, etc

MFI/NGO/Kiosks
Creation of Wealth
Disadvantaged Population
...For All!
Commercial Banks/ Regulatory Authorities
75
Thank You
76
Kisan Loan Card
77
Expected Benefits to Stakeholders

• Benefits to Tobacco Growers
• Instant cash availability
• Anytime access to money
• Easy registration and renewal
• Card acceptance in the future can be scaled up to
  other merchants

78
Teba Bank

• Retail bank targeting low income households in
  rural and small town southern Africa
• Developed a low cost handheld mobile
  Point-of-sale (PoS) device to be placed with an
  agent
• Wireless device with built-in GSM modem, card
  reader and micro printer
• Customer can use his debit card at this terminal
  to deposit cash, withdraw cash, seek balance
  enquiry and transfer funds
• Physical cash is deposited/disbursed by the agent
• The agents account is debited/credited
  simultaneously.
• A typical agent would be the local grocer