For More Information Relating to any Topic Please contact on 9988910592.

1. in Micro-financein Micro-finance
ICICI BANKICICI BANK

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Bank-led Model for Self HelpBank-led Model for Self Help
Groups (SHGs)Groups (SHGs)

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. MERGEDWITHBANKOF MADURA IN MAR’01
PROGRAMME IMPLEMENTEDBY BOMWAS NOT
SUSTAINABLE
ICICI BANKDECIDE TOIMPROVE BY IMPLEMENTING
3 TIERSTRUCTURE
SHG BANK LINKAGE MODEL

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. 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. 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. 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. 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. 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. 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. 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. WHAT KINDOF STRUCTURE WOULDBE ABLE
TO USE CAPITAL PARSIMONIOUSLY ANDBE SCALABLE
IN THE LONG RUN?

26. HOWCOULDINCENTIVES FORTHE
ORIGINATOROF THE PORTFOLIO(MFI) BE
STRUCTURED?
THIS CAN BE DONE THROUGH SECURITISATION

30. 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