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  • Basic Capacity Personal Computer UPS Web Cam Printer Phone Enhanced Capacity Scanner Photography Printing equipment Entrepreneur driven model requiring Internet Connectivity An ICICI Bank Checking Account Basic training in products & services
  • Customers marketing promotion & branding with ICICI Bank logo Entrepreneurs training counseling & support Finance Process product & process development driving connectivity through partners
  • Framework developed by Accion International

Track 2 b mor-icici microfinance bank Track 2 b mor-icici microfinance bank Presentation Transcript

  • ICICI Bank in Micro-finance: Breaking the barriers Nachiket Mor, Executive Director, ICICI Bank San Francisco, December 13, 2004
  • Agenda About ICICI Group ICICI Bank & Micro-finance New Revolutionary Channels Micro-finance in India What is Micro-finance Going Ahead
  • 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 Building a global presence Over 10 million retail customer accounts Asset base of Rs 1327.80 bn Profit after Tax of Rs 16.37 bn for FY04
  • 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 Bank’s annual technology operating expense per customer estimated to be 5-10% of global banks
    Branches m-Banking ATMs Internet Banking Call Centers Multi-channel delivery model
  • Transforming channel usage Share of transactions in March 2000 Channel 2% Internet & mobile 3% ATMs 94% Branches Call centre 1% Share of transactions in May 2004 17% 46% 27% 10% India’s largest online trading site with about 460,000 customers and 43% of NSE’s online trading volume
  • Agenda About ICICI Bank ICICI Bank & Micro-finance New Revolutionary Channels Micro-finance in India What is Micro-finance Going Ahead
  • What is micro finance…
      • 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.
    Micro credit Insurance and Investments Savings Transfer Payment
  • Institutional micro-finance is important for poor people…
    • Savings
    • Store excess liquidity for future use
    • Obtain returns on investments
    • Keep savings secure and confidential
    • Avoid negative returns on savings
    • Credit
    • Expand and diversify enterprises
    • Helps to reduce risk, improve management, raise productivity
    • Lower cost than credit from informal moneylenders
    • Helps increase household income
    … and helps smoothen cash flows across time
  • Agenda About ICICI Bank ICICI Bank & Micro-finance New Revolutionary Channels Micro-finance in India What is Micro-finance Going Ahead
    • 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
  • 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, Vijay”A framework for building a sustainable rural financial system (RFS) for India”, BASIX, www.basixindia.com
    • 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
    Banking with the poor is challenging… Customer needs Present status … and conventional banking may not be poised to meet these demands
  • Agenda About ICICI Bank ICICI Bank & Micro-finance New Revolutionary Channels Micro-finance in India What is Micro-finance Going Ahead
  • Identification of potential growth areas…
    • Urban India is a third of Indian population
    • Urban Middle to High income segment is highly competitive
    • Buyers’ market
    … provided compelling reasons to look at low income clients
    • Underserved market of 741 million
    • Credit demand estimated at Rs.450.0 billion
    • Tremendous potential for all financial services
    Urban Markets Low Income Markets
  • Profitable business opportunities exist… … setting the path for scale up Market size and potential of low income clients Low delinquency in pilot phase Creating bigger customers for future 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 Stepping stone to the entire rural market
  • Conventional Rural Banking Branch based Manpower intensive Channel driven Single Product focus Our strategy Entrepreneur based Technology intensive Customer driven Multiple Product approach An innovative strategy was evolved…
  • For unraveling the Bottom of the Pyramid (BOP) Low Income Middle Class Rich/ SME … through the right channels * Micro Finance Institutions Franchisees MFIs Kiosks Corporates
  • Agenda About ICICI Bank ICICI Bank & Micro-finance New Revolutionary Channels Micro-finance in India What is Micro-finance Going Ahead
  • Micro Finance Institutions
  • Existing micro finance models lacked scalability SHG-Bank Linkage Bank SHG Branch Bank-MFI Linkage MFI Bank Ind./SHG/JLG
    • Bank on lends to MFIs based on their capital
    • Branches assess credibility of individual SHG and monitor repayment process
    • Group formation by NGOs
    NGO
  • … which would leverage pre existing networks
    • 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
    New structures were required…
  • Partnership Model: Joining Hands to Scale up
  • 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 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
    Traditional Model of lending to MFIs…
  • … Led 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 being a small fraction of demand for finance
  • 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
  • … 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 Banks MFIs
  • Model 1 Clients Bank NGO Lends 100 No liability No consideration ROI payable Mobilises clients Capital allocation Against UL On 100 Efficient use of capital Y Incentive alignment N Not constrained by NGO b/s
  • Model 2
    • MFI
    ROI+service fee Clients Capital Allocation on 100 r.t MFI rating On-lends 100 Capital Allocation r.t UL on 100 s.t constraint of capital on MFI b/s Bank Lends 100 ROI Efficient use of capital N Incentive alignment Y
  • Partnership Model
    • MFI
    Clients Lends 100 not constrained by MFI b/s Bank Provides OD limit as a % of 100 advanced Commitment fee on OD and penal rate in the EoD K allocation Against Portfolio (100) and OD limit to MFI (x% of 100) Service fee Applicable ROI Origination & supervision 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
  • The Partnership Model–key 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
  • 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
  • Securitization: Creating a Secondary Market for Micro-finance
  • Securitization Credit Enhancement
    • 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
    Structure
  • Securitization: Pricing Parameters
    • 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
    Enablers
  • 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
  • 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
  • Sectoral initiatives to deepen the market The entity would provide quasi equity, credit wraps and technical & financial services to MFIs
    • 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
  • ICICI’s achievements in this field… Particulars SHG / JLG position Sep ‘04 … made possible through wide acceptance of the new models by MFIs Villages covered 8,781 Groups financed 39,740 No of Clients 456,712
  • … and commitment to scale up! 100000 300000 200000 400000 500000 600000 700000 800000 Mar’02 Mar’03 Mar’04 Mar’05 920,000 175,390 72,980 244,570 Number of clients 900000
  • Developing synergies through Corporate Partnerships…
  • Corporate Employees
    • 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
    Exploring Micro-Credit with Corporates… Corporate Foundation
  • … to make a difference Support SHGs formed by the corporate Create loyalty with the low wage workers Complement the corporates philanthropic initiatives
  • … Implemented Through a Partnership ICICI Bank
      • Provides developmental expertise
      • Recommends proven intervention strategies
      • Identifies NGOs to serve as resource partners
      • Can provide credit for micro-financial services
    Corporate
      • Funds the program at their chosen location
      • Builds capacity in their organization to manage program on an ongoing basis
      • Scales up over time to increase impact
    GIVE Foundation
      • Corporate philanthropy services acts as advisor in process
      • Facilitates relationship between company and NGO
      • Helps build detailed implementation plan and budget
  • In summary… Corporate Partnership Beneficiary SHG Entrepreneurs Contract Labourers Low Wage labour Educated Unemployed Microcredit Kiosks Housing Loan Insurance Provide access to Household assets 2 wheeler loans
  • Internet Kiosks Bridging digital divide through…
  • 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
  • Internet Kiosks… Connects rural India to the world Connectivity
    • STD/PCO:
    • Enabling voice communication
    Printer & Other Accessories : Enabling desk top publishing and other similar work
    • Kiosk Operator:
    • Entrepreneur
    • Provides commercial services
    Multimedia PC with Power backup Internet Kiosk
  • Concept of a kiosk
    • Shared Services Point
      • Includes village economy in the services distribution
      • Enhances local economy’s 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
  • 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
    as well as non-financial (partner services) Financial Products Non Financial Products
  • The drivers of Rural Internet Kiosks entrepreneurs & multi-service delivery The film
  • Challenges faced
    • Unfamiliarity with computers
    • No experience in managing business
    • Insufficient funds to start business
    • Inadequate products & services
    • No Internet Connectivity
    • New backend required
    • Unfamiliarity with products
    • New channel
    Customer Process Entrepreneur and how they were resolved
  • Learnings from the channel
    • Success contingent on Entrepreneur
    • Sustained marketing, sales support crucial
    • Implementation partners’ buy-in essential
    • Connectivity is the key
    • Prefer convenience of Kiosks
    • Demand for high value products
    Customer Process Entrepreneur Service and convenience wins hands down
  • Implications for future
    • Over 10,000 kiosks over the next year
    • Our services will be offered in 2000+
    • Extends outreach at low cost
    • Individual lending models
    • New products: remittance linked credit
    • Financial advisory services
    • Credit history available
    Customer Microfinance Network convenience, flexibility, a complete financial solution
  • ICICI Bank’s kiosk network is increasing… Kiosks offer low cost distribution capabilities for our products and services, reaching out to the rural population
  • Credit franchisee- adapting structured finance for rural segment Agri-input dealers Fuel-outlet owners Auto dealers CA/ Business
    • Personal balance
    • sheet scoring
    • model
    • Risk sharing by
    • franchisee
    • Dealing in retail
    • assets – home, 2
    • wheeler, auto loans
    • Insurance cross sell
    Franchisee roles Origination Credit scoring Documentation Collections 1 2 3 4 Channel concept Channel partners
  • … and meeting complete financial needs Disability *Framework by Accion Moving beyond credit… Life Cycle Events Death Property Covariant Health Certain Highly Uncertain Degree of Uncertainty Very Large Small Relative Loss / Cost Disability Savings, credit and investments Insurance Savings offering only partial coverage
  • Through comprehensive product suite Insurance (Ins) – Life and General Investments – Mutual Funds designed for Rural Channels Home Ins Weather Ins Tractor Ins Accident Ins Kiosks Micro Finance Life Ins
    • Parameters Covered
    • Precipitation
      • Rain
      • Snow
      • Hail
    • Temperature
    • Wind
    • Sunshine
    • Nature of losses
    • Production loss
    • Revenue loss
    • Asset loss
    • Loss of livelihood
    Offering weather insurance for losses due to vagaries of weather… Cover is provided for deviations from the optimum range required
  • 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
  • Securing rural lives through Insurance Life Insurance 0.2 mn members of Micro-credit Foundation of India covered by ICICI Pru/ ICICI Lombard 62.5 mn rural customers insured by ICICI Lombard covering mainly Personal accident as well as emerging products such as Weather and Health Insurance General Insurance
  • Agenda About ICICI Bank ICICI Bank & Micro-finance New Revolutionary Channels Micro-finance in India What is Micro-finance Going Ahead
  • 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…
  • And meeting finance needs of urban India also…
    • India’s urban population is 285 million
    • 27.8% of India’s population is in urban areas
    • 11% of world’s 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
  • Scaling up would require exploring new horizons Productivity Frontier (Financial and technological innovation) Limited services to limited customers Credit Bureau Technological innovation Allied Interventions Multiple delivery channels
  • 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
  • Pollinating the countryside with entrepreneurs… Identification of potential entrepreneurs willing to partner with ICICI Bank Training the entrepreneur on processes and assessing their capabilities Providing funds, know how & support for initiating operations Putting in place a fool proof system & robust processes for service delivery Providing the entrepreneur technical & financial support for delivering service Entrepreneurs Training Infrastructure Processes Service Delivery … for establishing MFIs, kiosks or becoming franchises in order to expand outreach to under served areas
    • Uncoupling of bank and front-line service operations
    • Appointing authorized agents
    • Opening accounts through agents
    • Enabling (card-based) transactions through agents, merchant outlets, ATMs
    • Lack of bank branches
    • No incentive to increase outreach
    • Customer perspective
      • Unable to fulfill KYC guidelines
      • Need for interacting with multiple institutions
    Need Vision Implementing hybrid agent-linked models…
  • … To provide universal access to finance Regulator support required for implementing the pilot project Agents loads value onto customers card by transfer from agent account and collects cash Direct Card Load Indirect Card load Collections Payments Value transferred to customer card from the customer’s bank account at branch Merchants transfers value from their own card to the agent and receive cash in return Value transfer from one customer to another in payment for services rendered
  • Allied Interventions – Mass Retailing Company
      • Piggy rides on the MFIs distribution channel
      • Ability to customise products
      • Cost effective reach to the under served segments of society
    MFI
      • 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 Clients
      • Access to goods which were not available earlier
      • Procures goods at a discount to the market rate
      • Repayment in easy installments
  • Allied Interventions – Livestock Productivity Spandana NDDB ICICI Bank Ltd. Extension
    • Facilitating fodder availability
    • Sourcing high yielding breed
    • Co-ordination for artifical insemination
    • Training for selection of good breeds
    Facilitation Majority of micro loans are for purchase of livestock
  • 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
    • 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
    Leveraging technology to reduce transaction costs
  • The Road Ahead…
    • Leveraging strong delivery capabilities to provide all financial services like insurance, savings, micro-investments, etc to the BOP markets
    1000 Franchises 40,000 internet kiosks 40 million clients 630,000 villages 200 MFI partners
  • 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
    Disadvantaged Population MFI/NGO/Kiosks Commercial Banks/ Regulatory Authorities
    • Leveraging strong delivery capabilities to provide other services like insurance, savings, micro-investments, etc
    Creation of Wealth ...For All!
  • Thank You
  • Kisan Loan Card Tobacco farmer issued a card Limit set on card on the basis of inputs availed by farmer & production needs Farmer has access to funds through cash dispenser Excess funds instantly swept to deposit account of farmer Tobacco sale proceeds offset against the loan availed
  • 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
    • Benefits to Tobacco Board
    • Increased operational efficiency in loan disbursement and recovery
    • Reduced paper work
    • Potential savings at the time of fund remittance to farmers
  • 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 agent’s account is debited/credited simultaneously.
      • A typical agent would be the local grocer