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Micro finance

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Micro finance

  1. 1. in Micro-financein Micro-finance ICICI BANKICICI BANK
  2. 2. PRESENTATION OUTLINES 1. Introduction to institutional credit in India 2. Introduction to ICICI bank 3. ICICI bank’s entry in to rural market 4. Micro finance initiatives 5. Issues 6. Queries
  3. 3. INTRODUCTION AFTER INDEPENDENCE MOST CHALLENGING JOB WAS TO ALLEVIATE THE POVERTY. TAKE FINANCIAL SERVICES TO THE UNDER SERVED SEGMENTS DEVELOPMENT FINANCIAL INSTITUTES WERE SET UP TO SUPPORT •INDUSTRIALISATION •INFRASTRUCTURE DEVELOPMENT
  4. 4. INSTITUTIONAL CREDIT SYSTEM IN INDIA  DESPITE STEPS TAKEN & PROGRAMME/SCHEMES IMPLEMENTED BY CENTRAL & STATE GOVERNMENTS FOR ALLEVIATION OF POVERTY AND NUMBEROF BANKS & FINANCIAL INSTITUTIONS COMING INTO EXISTENCE, THE LOWERSTRATA OF SOCIETY DIDNOT STANDTOBENEFIT. COMMERCIAL BANKS SET UP TO IMPROVE DELIVERY OF FINANCIAL SERVICES & TAKE ACCESS NATION-WIDE.FREQUENT LOAN WAIVERS LED TOHIGHDEFAULT RATE. THERE WAS REQUIREMENT OF 18% OF ADVANCE TO BE COMPULSORILY MADE TOAGRICULTURE SECTORAS DIRECT LENDING. CREDIT DELIVERY TO RURAL AREAS, PREDOMINANTLY FOR AGRICULTURE, AND FINANCIAL SERVICES TO UNDESERVED, WERE CONSIDEREDSYNONYMOUS. Contd..
  5. 5. VERY FEW PROGRAMMES FOCUSED ON MICRO ENTERPRISES OR ENCOURAGED DIVERSIFICATION FROM AGRICULTURE. THIS LED TO A FOCUS ON MERELY GEOGRAPHICAL EXPANSION TORURAL AREAS. THE CREDITS OFFERED BY BANKS WERE TOO LARGE TO BE MADE OF BY THE POOR RATHER THAN A SUITE OF PRODUCT DESIGNED TO CATER TO THEIRNEED. HENCE HIGHDEFAULT. IN EARLY 1990S, NABARD INTRODUCED SELF HELP GROUP (SHG) BANK LINKAGE MODEL WHICH BEGAN GETTING ATTENTION IN RURAL AREAS, WHILE HELPING IN ACHIEVE LOWER TRANSACTION COSTS THROUGH SERVING SEVERAL PERSONS AT ONE POINT. THE GROUP ALSO ACTED AS AN OUTSOURCED RISK ASSESSMENT & MONITORING SYSTEMWITHLOCAL LEVEL PRESENCE & KNOWLEDGE. THE CO GUARANTEE GIVEN BY THE MEMBERS ALSO SERVED AS A CHECK ON DEFAULT & PUT PRESSURE ON BORROWERS TOPAY BACKDUES IN TIME. Contd..
  6. 6. INTRODUCTION TO ICICIINTRODUCTION TO ICICI BANKBANK PROMOTEDBY ICICI LTD. IN 1994 2ND LARGEST BANKBUT LARGEST PRIVATE SECTORBANKIN INDIA LARGEST CONSUMERCREDIT PROVIDERIN INDIA OVER15 MILLION RETAIL CUSTOMERACCOUNTS SERVING OVER 2000 LARGE AND SMALL CORPORATE HOUSES WITH A VARIETY OF WHOLESALE ANDTREASURY PRODUCTS LARGEST PRIVATE SECTORLIFE ANDGENERAL INSURERIN INDIA BUILDING A GLOBAL PRESENCE, SUBSIDIARIES IN THE UK, CANADA, RUSSIA, BRANCHES IN SINGAPUR,BAHRAIN LARGEST RURAL ANDMICROLOANS PROVIDERIN THE COUNTRY ASSET BASE OF US$ 45 BN, PAT(PROFIT AFTERTAX) OF ABOUT US$500 MN ADR’s(AMERICAN DEPOSITORY RECIEPTS ) LISTEDON NYSE
  7. 7. ICIC BANK’S ENTRY IN TORURAL MARKET  Doorstep banking Flexibility in timings Timely availability of services Low value and high volume transactions Require simple processes with minimumdocumentation High cost of service delivery Timings and procedures: Rigid and inflexible High transaction cost forthe customers Expansion of branch network expensive and time taking Nature of DemandNature of Demand Nature of SupplyNature of Supply
  8. 8. Indian banking system has achieved a formidableIndian banking system has achieved a formidable outreach in rural areasoutreach in rural areas 49% (32,538) of all scheduled commercial bank49% (32,538) of all scheduled commercial bank branches are ruralbranches are rural 31% (131.1 million) of the total deposit accounts are in31% (131.1 million) of the total deposit accounts are in rural Indiarural India 43%(22.4 million) of total credit accounts are in rural43%(22.4 million) of total credit accounts are in rural IndiaIndia Number of people per branch has reduced from 64,000Number of people per branch has reduced from 64,000 in June 1969 to 15,000 in June 1997 (all India average)in June 1969 to 15,000 in June 1997 (all India average) Source:Source: BSR, March 31, 2001, Table 1.3, RBIBSR, March 31, 2001, Table 1.3, RBI Deolalkar, G.H., “The Indian Banking Sector: On the road to progress”, A StudyDeolalkar, G.H., “The Indian Banking Sector: On the road to progress”, A Study of Financial Marketsof Financial Markets RURAL BANKING IN INDIA:RURAL BANKING IN INDIA: PROGRESS MADEPROGRESS MADE
  9. 9. For the rural population of 741.0 millionFor the rural population of 741.0 million – Population per branch: 22,793Population per branch: 22,793 – Penetration of savings accounts is belowPenetration of savings accounts is below 18%18% – Number of villages per branch: 19Number of villages per branch: 19 High dependence on informal sourcesHigh dependence on informal sources – 36% of rural credit from informal sources36% of rural credit from informal sources – Dependence even higher for lower incomeDependence even higher for lower income households: 78%households: 78% GAPS PERSIST IN OUTREACH TOGAPS PERSIST IN OUTREACH TO THE POORTHE POOR
  10. 10. BANKING WITH POOR IS CHALLENGING, AND CONVENTIONAL BANKING WAS NOT POISEDTO MEET THESE DEMANDS. HENCE BANK DECIDES TO WORK WITH MODELS WHICH WOULD COMBINE THE STRENGTHS OF INTERMEDIARY FORMS OF ORGANISATIONS WITH THE FINANCIAL BANDWIDTHOF A BANKING INSTITUTION.
  11. 11. MICROFINANCE INITIATIVES MFIs/NGOMFIs/NGO Variety of models under implementation with stress on  Doorstep delivery of services  Professional management and computerized systems Govt /NABARDGovt /NABARD SHG-BankLinkage Program launched with ambitious targets  Nearly 1 mn SHGs promoted  Rs.39 bn disbursement
  12. 12. Bank-led Model for Self HelpBank-led Model for Self Help Groups (SHGs)Groups (SHGs)
  13. 13. The SHG Bank linkage Model…The SHG Bank linkage Model… StructureStructure BankBank SHGSHG BranchBranch • Branches assess credibility of individual SHG and monitor repayment process Group formation by BankorNGOs • Branches assess credibility of individual SHG and monitor repayment process Group formation by BankorNGOs NGO  Public Sectorbanks 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 Sectorbanks 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 CharacteristicsCharacteristics
  14. 14. MERGEDWITHBANKOF MADURA IN MAR’01 PROGRAMME IMPLEMENTEDBY BOMWAS NOT SUSTAINABLE ICICI BANKDECIDE TOIMPROVE BY IMPLEMENTING 3 TIERSTRUCTURE SHG BANK LINKAGE MODEL
  15. 15. 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 3 TIER STRUCTURE OF ICICI3 TIER STRUCTURE OF ICICI BANKBANK thereby enabling increase in outreach from 1,200 SHGs to more than 12,000 SHGs in 3 years
  16. 16. ADVANTAGES OF LINKAGE MODEL •No risk sharing of financial stake/performance stake of intermediary (NGO) in group formation (responsibility of NGO limited to group formation only). •ICICI bank also involved Self Help Promotion Institutions & outsourced the work of group formation to them in which case the bank staff (Project Managers) were replaced by external entity. But…… •There was still a need to control group formation and link it to credit discipline. •Despite all initiatives taken by the bank, the linkage model reached a saturation point.
  17. 17. 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 BranchesExisting Branches New BranchesNew Branches Bank led SHG banking was notBank led SHG banking was not scalablescalable NEEDOF MICROFINANCE INSTITUTIONS INTERMEDIATION WAS FELT
  18. 18. Bank Extends loan to MFIs Create charge on capital forthe loan to MFI Bank Extends loan to MFIs Create charge on capital forthe loan to MFI MFI Extends loan to clients Create charge on capital forthe loan to clients MFI Extends loan to clients Create charge on capital forthe loan to clients ClientsClients MFI INTERMEDIATIONMFI INTERMEDIATION MODELMODEL
  19. 19. OPTIMIZING COSTSOPTIMIZING COSTS  Branch license – manpower intensive process  Staff Costs – at least 10 times due to highersalary structure in Commercial banks  Largeroverheads due to centralized operations and largergeographies covered  Branch license – not applicable  Staff costs – substantially lowerdue to hiring of local manpower  Considerably lowercost structures due to local area approach BankCostsBankCosts MFI CostsMFI Costs LEADING TOA REDUCTION OF UPTO6% IN TRANSACTION COSTS
  20. 20. CONSTRAINTS OF MFIICONSTRAINTS OF MFII MODELMODELDOUBLE CHARGE ON CAPITAL CREATED – ONE WHEN BANK LENDS TO MFI & 2ND WHEN MFI LENDS TO THE CLIENT. •MFIS COULD NOT GROW TO THE REQUIRED LEVEL DUE TO NON- AVAILABILITY OF ADEQUATE CAPITAL AND OPERATION WITH LIMITED DEBT FUNDING. •LIMITED SCOPE FOR MFI FOR RAPID SCALE UP, IN THE ABSENCE OF EQUITY INVESTERS. •MFIS EXPOSED TO THE RISK OF LENDING TO END CLIENTS. •AREA OF OPERATION OF MFI WAS LIMITED, RESULTING IN LARGER RISK. •IF MFIS COLLAPSED DUE TO INTERNAL PROBLEMS, ENTIRE CLIENT SEGMENT WILL DERAIL. •THIS MODEL HAD COMPETENCIES OF THE BANK ON ONE SIDE & SOCIAL INTERMEDIATION EXPERTISE OF THE MFI ON THE OTHER. THERE WAS A NEED TO COMBINE STRENGTHS OF BOTH INSTITUTIONS AND ALSO BUILDING IN CASH INCENTIVES & JUDICIOUS USE OF CAPITAL FOR MAXIMUM CLIENT OUTREACH
  21. 21. ISSUESISSUES SHOULD ICICI MODIFY THEIR EXISTINGSHOULD ICICI MODIFY THEIR EXISTING MODEL? IS A NEW STRUCTURE ALTOGETHERMODEL? IS A NEW STRUCTURE ALTOGETHER REQUIREDREQUIRED WHAT KIND OF STRUCTURE WOULD BE ABLEWHAT KIND OF STRUCTURE WOULD BE ABLE TO USE CAPITAL PARSIMONIOUSLY AND BETO USE CAPITAL PARSIMONIOUSLY AND BE SCALABLE IN THE LONG RUN?SCALABLE IN THE LONG RUN? HOW COULD INCENTIVES FOR THEHOW COULD INCENTIVES FOR THE ORIGINATOR OF THE PORTFOLIO(MFI) BEORIGINATOR OF THE PORTFOLIO(MFI) BE STRUCTURED?STRUCTURED? HOW CAN ICICI ENSURE THAT THE NEWHOW CAN ICICI ENSURE THAT THE NEW MODEL BE COMMERCIALLY VIABLE ANDMODEL BE COMMERCIALLY VIABLE AND INCENTIVIZE GROWTH?INCENTIVIZE GROWTH?
  22. 22. YES, To separate the risk of the MFI from the risk inherent in the micro finance portfolio. To provide a mechanism for banks to incentivize partner MFIs continuously, especially in a scenario where the borrower entered into a contract directly with the bank and the role of the MFI was closer to that of an agent. To deal with the inability of MFIs to provide risk capital in large amounts, which limits the advances from banks, despite a greater ability of the latter to provide implicit capital.A model was needed to separate the risk of the MFI from the risk inherent in the loan portfolio. SHOULDICICI MODIFY THEIREXISTING MODEL? IS A NEWSTRUCTURE ALTOGETHERREQUIRED
  23. 23. WHAT KINDOF STRUCTURE WOULDBE ABLE TO USE CAPITAL PARSIMONIOUSLY ANDBE SCALABLE IN THE LONG RUN?
  24. 24. HOWCOULDINCENTIVES FORTHE ORIGINATOROF THE PORTFOLIO(MFI) BE STRUCTURED? THIS CAN BE DONE THROUGH SECURITISATION
  25. 25. HOWCAN ICICI ENSURE THAT THE NEWMODEL BE COMMERCIALLY VIABLE ANDINCENTIVIZE GROWTH? THROUGH INTENSIVE MARKET DEVELOPMENT INITIATIVES , INNOVATIVE STRATEGIES AND RESEARCH .  BY CREATING A SECONDARY MARKET IN INDIA FOR MICRO- FINANCE RECEIVABLES URBAN POVERTY NEEDS TO BE ADDRESSED  OVER 300 COMMERCIAL AND CO-OPERATIVE BANKS WILLING TO PURCHASE MICRO-FINANCE RECEIVABLES  ICICI BANK IS WORKING WITH RATING AGENCIES FOR CREDIT ENHANCING MICROFINANCE ASSETS FOR BETTER RATINGS OFFERING INSURANCE AS A RISK MITIGANT TO TAKE CARE OF CREDIT DEFAULTS

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