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  • Against an estimate demand of Rs. 20,000 crore to Rs. 50,000 crore for credit, the supply from financial sources was less than Rs. 2500 crores Traditionally, it has been believed that the poor are not bankable. The main reasons relate to Lack of information on the income flows and expenditure patterns of households (which makes it difficult to assess whether the individual will be able to pay for the services. E.g. in the urban retail client some indicators used are salary slip, income tax return, ownership of assets, number of family members, etc.) The costs of reaching services is very large. E.g. SHARE one of the largest micro finance organisations in the county employs over 3000 people to service a portfolio of Rs. 2000 million. Banks typically handle much larger amounts per individual (ICICI Bank has a 5 person micro-finance team that handles Rs. 4000 million) The absence of facilitative environment such as absence of well functioning commodity markets, non existence of credit bureaus, etc. act as a hindrance. Indian regulations do not permit MFIs to collect savings. However, the FM’s in his budget speech has allowed Banking Correspondents.
  • It is an attempt to marry the bank’s strength and the MFI s weaknesses and viceversa FLDG
  • We don’t just find mature MFIS
  • HR thro micro financejos.com
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    1. 1. Microfinance & ICICI Bank June 2007
    2. 2. Agenda Microfinance Institutions (MFIs) Way Forward Financial Intermediation Models Microfinance: An Overview
    3. 3. Microfinance vs Microlending “ Poor people borrow some of the time but save all of the time” Very Poor People who have few (if any) assets – very limited chances to earn money credit savings Entrepreneurial Poor Self Employed Poor Laboring Poor Very Poor The Poverty Pyramid Entrepreneurial Poor People who are slightly below the poverty line. Laboring Poor Farm laborers, domestics and unemployed workers Self-Employed Poor Poor people who are meeting their basic needs by running microbusinesses *Source: FINCA’s Poverty Pyramid insurance The need of customer is more than credit….
    4. 4. Constraints to scaling <ul><li>Information Asymmetry </li></ul><ul><li>Inability of the poor to offer collateral </li></ul><ul><li>No credit history available </li></ul><ul><li>Potential success of enterprises difficult to evaluate </li></ul><ul><li>High Costs of Intermediation </li></ul><ul><li>Low value, high volume transactions </li></ul><ul><li>High Transaction Costs (8-20%) </li></ul><ul><ul><li>Low use of technology </li></ul></ul><ul><ul><li>High supervision costs </li></ul></ul><ul><ul><li>High cash handling costs </li></ul></ul>Regulatory Issues Poorly functioning Markets Staff Incentives within organisations not aligned to maximise access to financial services for poor Provision of microfinance is constrained by…
    5. 5. Agenda Microfinance Institutions (MFIs) MFIs – Financial Intermediation Models Way Forward Microfinance: An Overview
    6. 6. Microfinance Institutions (MFIs) Cooperatives/MACs/federations Typical MicroFinance Institutions (MFIs) Multiservice NGOs & SHPIs - under NABARD’s SHG Bank linkage <ul><li>following various delivery </li></ul><ul><li>(i) Group delivery models </li></ul><ul><ul><li>SHGs </li></ul></ul><ul><ul><li>JLGs </li></ul></ul><ul><li>(ii) Individual banking </li></ul><ul><li>(iii) Adaptations of above </li></ul><ul><li>Registered as </li></ul><ul><li>Societies </li></ul><ul><li>Trusts </li></ul><ul><li>Section 25, not for profits </li></ul><ul><li>NBFCs </li></ul><ul><li>Others </li></ul>
    7. 7. Self Help Group (SHG) - Model <ul><li>Affinity group of 10-20 members </li></ul><ul><li>Weekly group meetings </li></ul><ul><li>Leader elected by group members </li></ul><ul><li>Small and regular savings </li></ul><ul><li>Group has a savings bank account operated by group representative </li></ul><ul><li>Internal lending to members from own savings </li></ul><ul><li>External loan to the Group as a whole </li></ul><ul><li>Disbursement of loans to members at the discretion of group </li></ul>
    8. 8. Joint Liability Group (JLG) – Grameen Model <ul><li>5 member Joint liability Groups </li></ul><ul><li>40 member centers </li></ul><ul><li>Weekly group meetings </li></ul><ul><li>Established methodology for </li></ul><ul><ul><li>Client screening </li></ul></ul><ul><ul><li>Group recognition </li></ul></ul><ul><ul><li>Loan sanctioning </li></ul></ul><ul><ul><li>Collections </li></ul></ul><ul><li>Collections enforced through </li></ul><ul><ul><li>Joint liability </li></ul></ul><ul><ul><li>Peer pressure </li></ul></ul><ul><li>One time membership fee </li></ul>*Photograph: Swayam Krushi Sangam, Hyderabad
    9. 9. Agenda Microfinance Institutions (MFIs) MFIs – Financial Intermediation Models Way Forward Microfinance: An Overview
    10. 10. Traditional models lack scalability… SHG-Bank Linkage Bank SHG Branch Bank-MFI Linkage MFI Bank Ind./SHG/JLG <ul><li>Bank on lends to MFIs based on their capital </li></ul><ul><li>Branches assess credibility of each SHG and monitor repayment process </li></ul><ul><li>Group formation by NGOs </li></ul>NGO
    11. 11. Hence, the ICICI Bank Partnership <ul><li>Provider of loan funds, mezzanine equity and technology </li></ul><ul><li>Lends directly to clients with risk-sharing by NGO/MFI </li></ul><ul><li>Decides pricing and risk sharing by NGO/MFI based on historical data </li></ul><ul><li>Undertakes loan origination, monitoring and collection </li></ul><ul><li>MFI provided OD limit by Bank equivalent to amount of risk sharing, which is drawn in event of default upto specified limit </li></ul><ul><li>Transfer of economic capital from Bank to MFI </li></ul>Structure separates risk of the MFI from risk of the portfolio ICICI Bank MFIs
    12. 12. Moving on – Buyouts: Credit Enhancement <ul><li>ICICI Bank identifies portfolio based on fulfillment of minimum criteria and past portfolio performance </li></ul><ul><li>MFI continues to collect receivables from the borrowers </li></ul><ul><li>MFI equity leverage reduced enabling it to originate further assets </li></ul><ul><li>MFI provides ICICI a credit enhancement in the form of a FLDG </li></ul><ul><li>FLDG is based on expected losses in the loan portfolio </li></ul><ul><li>Detailed study of past portfolio data conducted to arrive at expected loss rates </li></ul>Structure
    13. 13. Agenda Microfinance Institutions (MFIs) MFIs – Financial Intermediation Models Way Forward Microfinance: An Overview
    14. 14. Large geographic asymmetries exist… <ul><li>Very Few MFIs </li></ul><ul><li>Economically Backward </li></ul><ul><li>Low level of micro credit </li></ul><ul><li>penetration </li></ul><ul><li>Large no. of MFIs </li></ul><ul><li>Economically Vibrant </li></ul><ul><li>High micro credit </li></ul><ul><li>penetration </li></ul>… Requires reduction of geographic asymmetries and increasing depth of outreach…
    15. 15. The Universe... The Universe... The Universe... Different resources required at different stages
    16. 16. Building Blocks…. MFI Model Funds Capital Manpower Technology Training
    17. 17. The Resources Required... <ul><li>Funds and Capital – through Banks and VCs </li></ul><ul><li>Technology – Leveraging the developments </li></ul><ul><li>Human Resources </li></ul><ul><ul><li>Training and Capacity Building for nascent MFIs </li></ul></ul><ul><ul><li>Manpower Requirement for bigger MFIs </li></ul></ul><ul><li>Knowledge and Information </li></ul><ul><ul><li>Mentoring on advanced financial instruments </li></ul></ul><ul><ul><li>eg: Treasury Operations, ALM </li></ul></ul>
    18. 18. Finance – bringing in risk equity <ul><li>Initial investment by venture capitalists – start ups. </li></ul><ul><li>Tie up with local venture capital firms. On-lending funds available from ICICI Bank for building portfolio </li></ul><ul><li>Exit route - ICICI Bank provides long term debt (quasi equity) to MFI to free up initial investments </li></ul>Take out finance model <ul><li>Performance guarantees from corporates / banks </li></ul><ul><li>Guarantees leveraged – 3 to 4 times </li></ul><ul><li>Business planning and monitoring throughout the loan period </li></ul><ul><li>Documentation support to MFIs </li></ul>Guarantees leveraged
    19. 19. Finance – access to secondary markets <ul><li>Creating intermediary Financial Institution to provide assistance to Indian MFIs </li></ul><ul><li>Enabling access of MFIs to mainstream capital/ debt markets </li></ul><ul><li>Enhance resource flows from commercial banking sector </li></ul>The entity provides quasi equity, credit enhancement and technical & financial services to MFIs
    20. 20. And supporting systems… Operational processes <ul><ul><li>Data recording system for start up MFIs </li></ul></ul><ul><ul><li>Business process re-engineering for mature MFIs </li></ul></ul><ul><ul><li>Internal control and auditing systems for multi-branch operations </li></ul></ul><ul><ul><li>Cash flow management </li></ul></ul>Technology <ul><ul><li>Microbanking solution </li></ul></ul><ul><ul><li>FINO </li></ul></ul><ul><ul><li>Automation through card based solutions / handhelds </li></ul></ul><ul><ul><li>Evolution of banking interface of MFIs </li></ul></ul>
    21. 21. Human Resources… Fresh passouts <ul><li>Microfinancejobs.com </li></ul><ul><li>Head hunters for senior level recruitment </li></ul>Building a pipeline <ul><li>Campus recruitments from institutions in MFI command area </li></ul><ul><li>Induction into MFI operations </li></ul><ul><li>Working with Universities, local institutes for specific course in MF </li></ul><ul><li>Content development </li></ul><ul><li>Tie up with institutes like NIIT and APTECH for FINO training </li></ul>Lateral
    22. 22. Enhancing Skills… <ul><ul><li>Client assessment </li></ul></ul><ul><ul><li>Accounting and financial analysis </li></ul></ul><ul><ul><li>Management of information </li></ul></ul><ul><ul><li>Process flow and monitoring </li></ul></ul><ul><ul><li>Internal control </li></ul></ul><ul><ul><li>Market research </li></ul></ul><ul><ul><li>Client needs assessment and hybrid product design </li></ul></ul>Staff Skills Product development
    23. 23. Building Capacities… Mentoring <ul><ul><li>Corporate governance – ICICI Bank volunteering </li></ul></ul><ul><ul><li>Centre for Microfinance Research </li></ul></ul><ul><ul><ul><li>Impact assesment </li></ul></ul></ul><ul><ul><ul><li>Innovative products </li></ul></ul></ul><ul><ul><ul><li>Research - collaboration with international universities </li></ul></ul></ul><ul><ul><ul><li>Advance financial training for senior management of MFIs </li></ul></ul></ul><ul><ul><li>Integrated support structure under IFMR Trust </li></ul></ul>Initiatives promoting long term sectoral growth…
    24. 24. Beyond Microcredit <ul><li>Need for Diversification in the sector </li></ul><ul><li>Microcredit just the starting point </li></ul><ul><li>Larger suite of financial services - Insurance, Savings and Remittances </li></ul><ul><li>To provide these services there is a need to have a: </li></ul><ul><li>A clear understanding of the CUSTOMER and </li></ul><ul><li>Technology that enables the delivery CHANNEL </li></ul>
    25. 25. Thank you