ICICI Bank in Micro- finance: Breaking the barriers

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

3 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

4 About ICICI Group Agenda ICICI Bank & Micro-finance Issues… Micro-finance in India

5 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 Rural banking in India: progress made

6 But large gaps persist in outreach to the poor For the rural population of 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,

7 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 Banking with poor is challenging… …and conventional banking was not poised to meet these demands…

8 …leading to new innovations in credit delivery MFIs/NGO Variety of models under implementation with stress on Door step delivery of services Professional management and computerized systems Govt / NABARD SHG-Bank Linkage Program launched with ambitious targets Nearly 1 mn SHGs promoted Rs.39 bn disbursement

9 About ICICI Group Agenda ICICI Bank & Micro-finance Issues… Micro-finance in India

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

11 The SHG Bank linkage Model… Structure Bank SHG Branch Branches assess credibility of individual SHG and monitor repayment process Group formation by Bank or NGOs Branches assess credibility of individual SHG and monitor repayment process Group formation by Bank or NGOs NGO Public Sector banks implementing Government schemes Poverty eradication Financing farmers and small entrepreneurs Emphasis on SHGs Concept promoted by NABARD I mn SHGs financed Innovative Practices Oriental Bank Public Sector banks implementing Government schemes Poverty eradication Financing farmers and small entrepreneurs Emphasis on SHGs Concept promoted by NABARD I mn SHGs financed Innovative Practices Oriental Bank Characteristics

12 Divisional Manager Project Manager Coordinators Promoters 20 Bank employees able to manage project 1 Coordinator manages 6 Promoters with each Promoter forming & managing 20 SHGs ICICI Bank staff Outsourced staff (leaders of old SHGs) SHGs Community Group of 20 poor women …was modified by ICICI Bank… …thereby enabling increase in outreach from 1,200 SHGs to more than 12,000 SHGs in 3 years

13 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 Limited outreach Concentrated in urban areas High cost low ticket items Cash intensive transaction Transaction cost of 8-20% Existing Branches New Branches Bank led SHG banking was not scalable… …and we decided to look beyond our own network…

14 Bank Extends loan to MFIs Create charge on capital for the loan to MFI Bank Extends loan to MFIs Create charge on capital for the loan to MFI MFI Extends loan to clients Create charge on capital for the loan to clients MFI Extends loan to clients Create charge on capital for the loan to clients Clients …at channels of MFI lending

15 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…

16 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

17 …leading to the paradox… Banking system capable of providing large quantum of wholesale finance to the ultimate clients Banking System MFIs / NGOs Clients A burgeoning segment with effective demand for finance Grass-root agencies capable of providing origination and supervision support in a cost-effective manner …of supply not being channelised to meet the demand

18 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