Need for MicroFinance

Evolution of Microfinance in India

• Microfinance has been in practice for ages ( though informally). • Legal framework
for establishing the cooperative movement set up in 1904. • Reserve Bank of India
Act, 1934 provided for the establishment of the Agricultural Credit Department.
• Nationalisation of banks in 1969 • Regional Rural Banks created in 1975. • NABARD e
stablished as an apex agency for rural finance in 1982. • Passing of Mutually Aide
d Co-op. Act in AP in
Considerable gap between demand and supply for all financial services Majority o
f poor are excluded from financial services. This is due to, the following reaso
ns 5. Bankers feel that it is fraught with risks and uncertainties. 6. High tran
saction costs 7. Unfavourable policies like caps on interest rates which effecti
vely limits
While MFIs have shown that serving the poor is not an unviable proposition there
are issues that have constrained MFIs while scaling up. These include 2. Lack o
f an appropriate legal vehicle 3. Limited access to equity 4. Difficulty in acce
ssing low cost onlending funds (as of now they are unable to offer savings servi
ces in a legitimate manner.
• Limited access to Capacity Building support which is an important variable in te
rms of quality of the portfolio, MIS, and the sustainability of operations. • Abou
t 56 % of the poor still borrow from informal sources. • 70 % of the rural poor do
not have a deposit account • 87 % have no access to credit from formal sources. • L
ess than 15 % of the households have any kind of insurance. • Negligible numbers h
ave access to health
Features of Indian MF
• About 60 % of the MFIs are registered as societies. • About 20 % are Trusts • About
65 % of the MFIs follow the operating model of SHGs. • Large concentration in Sout
h India • 600 MFI initiatives have a cumulative outreach of 1.25 crore poor hoseho
lds • NABARD’s bank linkage program has cumulatively reached a total of 9.4 lakh SHG
s with about 1.4 crore households.
Bank of Madhura SHG
FUNDAMENTAL OF “SUSTAINALBLE WAY”
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Microfinance: ICICI Bank’s Approach
Microfinance: An Overview
Financial Intermediation Models
ICICI Bank’s Approach
MF is a Tool for Poverty Reduction
• Working capital • Household investment in diversification • Better balance sheets
– More assets – Secure stores of value
• More profitable economic activities • More productive savings strategies
Constraints to scaling access for the poor
Information Asymmetry • Inability of the poor to offer collateral • No credit histor
y available • Potential success of enterprises difficult to evaluate High Costs of
Intermediation • Low value, high volume transactions • High Transaction Costs (8-20
%) • Low use of technology • High supervision costs • High cash handling costs
Provision of microfinance is constrained by…
Poorly functioning Markets
Regulatory Issues
Staff Incentives within organisations not aligned to maximise access to financia
l services for poor
Agenda
Microfinance: An Overview
Financial Intermediation Models ICICI Bank’s Approach Global Remittance model
TWO INNOVATIVE MODELS
• THE DIRECT-ACCESS-BANK LED MODEL
– Promotion of Self Help Groups – Leveraging upon the merger with the Rural Banking
institution Bank of Madura
• THE INDIRECT CHANNEL PARTNERSHIP
– With Micro-Finance Institutions
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Traditional models lack scalability…
SHG-Bank Linkage Bank Bank
Bank-MFI Linkage
Branch NGO SHG
MFI
Ind./SHG/JLG
• Branches assess credibility of each • Group formation by NGOs
SHG and monitor repayment process
• Bank on lends to M FI s based on their capital
Hence,the ICICI Bank Partnership
ICICI Bank
Provider of loan funds, mezzanine equity and technology

MFIs
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 up
to specified limit

Lends directly to clients with risk-sharing by NGO/MFI

Decides pricing and risk sharing by NGO/MFI based

Transfer of economic
Structure separates risk of the MFI from risk of the portfolio
Moving on – Buyouts:
Structure ICICI Bank identifies portfolio based on fulfillment of minimum criter
ia and past portfolio performance MFI continues to collect receivables from the
borrowers MFI equity leverage reduced enabling it to originate further

Credit Enhancement
MFI provides ICICI a credit enhancement in the form of a FLDG FLDG is based on e
xpected losses in the loan portfolio Detailed study of past portfolio data condu
cted to arrive at expected loss rates
Agenda
Microfinance: An Overview
Financial Intermediation Models ICICI Bank’s Approach Global Strategy
Maintaining High Growth Rate on Sustainable Basis requires…
High growth rate across all the three sectors:Primary, Secondary and Tertiary Li
nking rural and semi-urban areas to the mainstream of Development Addressing the
problem of migration by ‘Providing Urban Amenities in Rural Areas’
ICICI Bank’s Approach
Sound state of economy
Level of Economy
Participation of Main Stream Organizations to facilitate Community Based Institu
tions
Financial resources for on-lending
ICICI Bank Initiatives
Access to equity capital at both at the start –up stage as well as for growth
Community based financial institutions
Financial engineering and product development
Links with capital markets as the entities mature
Developing a network of community based financial institutions
Critical Required Steps Initiatives
Venture capital funds for MFIs Specialized Institutions for research training an
d product design capabilities Specialized institutions for providing consulting
services to MFIs Specialized institutions providing technological solutions and
services to finance providers Access to Manpower
Initiatives of ICICI Bank Initiatives of ICICI Bank
Tie up with Bellwether Microfinance Fund, Avishkar-Goodwell Fund & Lok Capital F
und Creation of the Centre for Micro Finance, Centre for Insurance & Risk Manage
ment at IFMR, Chennai Launch of the MFI Strategy Unit with the Centre for Micro
Finance at IFMR, Chennai Launch of FINO; 20% stake of ICICI Bank in FINO Launch
of [Link]
Dedicated Microfinance Development Team
Creating specialized network organizations to build links between the poor & lar
ge Areas
Handicrafts Foods Village Based Tourism
Initiatives of ICICI Bank
Building bridges between the artisans and main stream markets (Sandhi (NGO)) Exp
loring ways to fill the gaps in value chain of food produce in collaboration wit
h MFIs/NGOs Exploring ways to support such tourism projects Forging relationship
with all stake holders in skills Training and Employment Gram IT (Rural BPO Mod
el) by Byrraju Foundation being supported by ICICI Bank
Skills Training & Job Placements Village Based Business Process Outsourcing
Requires working in close collaboration with state, district and local level gov
ernment and private organizations
Health and Education related initiatives of SIG
Creation of ‘Development Strategy Group’
ICICI Bank’s Initiatives
Creation of ‘Centre for Development Finance’ at IFMR
Placement of highly trained persons in each NWS clusters of ICICI Bank Charged w
ith the responsibility for Identifying and developing partnerships with governme
nt and private bodies
Conceptualizing Development Strategy for Krishna District using the concept of ‘Gr
owth Diagnostic’ & ‘Prioritization Framework’; study to be replicated in other distric
ts of India (one of the projects of CDF in collaboration with ICICI bank)
Microcredit
• ICICI Bank has been following the existing micro finance models • In addition, ICI
CI Bank has been expanding its microcredit portfolio through
– Partnership model – Portfolio buyouts
…a steady growth in group lending through MFIs continues 12,32
5
15,09 6
4240
1100 120
Rs. in millio n
440 Mar’0 3 Mar’0 4 Mar’0 5 Mar’ Mar’
Mar’0 2
Micro Savings Account
• Low value savings and deposits product • Addressing the needs of
– Small & Marginal Farmers/ Daily Wage Earners – Medium Farmers/ Entrepreneurs/ Sala
ried
• Features
– Zero balance account
Business Correspondent (BC) financial and An intermediary of Bank in providing
banking services
Services being provided
Small value deposits (savings, recurring & fixed deposits) Disbursal and recover
y of small value loans Receipt and delivery of small value remittances Who can b
e a Business Correspondent MFIs/ NGOs Co-operative Societies Sec 25 companies
Technology Used in BC
Customer Transaction card ( Smart Card )
Business Corresponde nt
Authentication Device (AD)
Bank
Core Banking Solution (CBS)
Technologies in Microfinance
What Technologies? • Information Systems (IS) Tech:Custom built IS s/w to track Fi
n Transactions and create Reports for Management, Donors and Regulators • Large MF
Is n Banks use ATMs, POS(Point Of Sale n/w) and Mobile Phone banking. Eg SKS usi
ng Handheld Smart Cards • Use of Biometric ATMs , PDAs(Personal Digital Assistants
) and Voice
Why Technologies?
• More Informed Decisions: Predict Cash Needs and anticipate and respond to Crisis
• Increased Flexibility: Customer Mobility • Lower Operating Costs: Mibanco (Peru)
reduced it’s Loan Origination cost by 10% by streamlining it’s Loan Approval Process
• Increased Deposits: By placing easy to use ATMs in well trafficked areas Prodem
(Bolivia) was able to increase it’s business manifold
Limitations of Technologies:
• Technology will not solve deficiencies in MFI’s business strategy or operational p
rocess. Before beginning any technology planning, the org. must be clear on its
mission, goals, and especially operational procedures.
ICICI Venture Capital
Venture Capital
• Private equity capital provided by professional investors to new growth business
es. • High-risk investments • Potential for above average returns • Popular among new
companies who cannot raise funds through debt issue.
ICICI Venture Capital
• Challenge in scaling up microfinance sector is lack of equity capital • To cover t
his shortage,ICICI Bank is encouraging venture capitalists to start entering the
sector. • Lok Capital at Delhi • Aavishkar at Mumbai • Bell Weather at Hyderabad
The Funds
• Bell Weather, Hyderabad has made 3 equity commitments for start up and decided t
o raise fund amount from US $10mn to US $25mn • Lok capital mobilizes and directs
capital fund to finance microfinance initiatives and technical support for MFI’s • A
avishkar provides micro-equity funding of $25000 to $100000
Other Initiatives
Agri - Micro-credit initiatives
• Innovative structure for micro-credit in rural areas • Channels for delivering mic
ro-credit
– – – – Sugar companies Seed producers Input companies NGOs and micro credit institution
s – Overcome the reach problem – Lower administration costs
These channels help build volumes, reduce costs and monitor credit risk
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• FSC provides one stop solution to the farmer
– – – – – Agri extension support Inputs and other services Credit Market linkage Rural inf
rastructure
Agri - Farmer Service Centres (FSCs)
• These FSCs are promoted by Agri Input suppliers , and avoids duplication of effo
rts by different
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• Give Online: On-line donation channel
– Retail donors can donate to specific initiatives across India – 100% of donations
reach the initiative – Prompt feedback on utilisation of grant – Rs. 11.5 million to
wards Gujarat Earthquake
Social Initiatives ICICIcommunities
• Shop the Cause: On-line shopping mall
– Over 100 exquisite hand crafted products available
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Innovations in Delivery Channels India (SARI) • Sustainable Access for Rural
project
– Partners: MIT Media Labs, Harvard University, IIT-Chennai, I-Gyan, DHAN Foundati
on, ICICI Ltd – Providing reliable Internet access through Kiosks in rural Madurai
using corDECT WiLL – 100 kiosks managed by entrepreneurs to be set-up – Providing e
-governance, communication and information services
• Possibility of delivering banking services
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Future Initiatives and Products
• Rural ATM Machine
– Currently in development in the lab of [Link] Jhunjhunwala
• Mobile ATM
– To be installed in ICICI-branded trucks that would circulate in a number of vill
ages
Smart Card Based Payment System
•
Smart Cards … An alternative Difficulty in rural banking
– Management of Cash
• Cost of idle cash • Cost of cash handling infrastructure
– Geographical spreads
• Solutions through
– Elimination/ reduction of cash handling – Innovation of low cost delivery channels
• Smart Card - an ideal vehicle
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Future Initiatives and Products
• Insurance
– Using insurance to manage risks – Rain insurance- Allows framers to collect money
during droughts
• Venture capital model
– Enable the poor to invests in long term assets – Model would spur economic activit
ies
• Derivatives
– Many farmers already involved in informal derivative dealing by buying and selli
ng crop futures
Weather Insurance: Covers Risks beyond the Customers’ Control
Production Risks Output Risks
Controllable Risks
Pest and Improper Cultivation Spurious Inputs Policy Risk
Price Risk
Customization of Insurance Products
•I ntegrated product offering – Life and General insurance •Simplified premium calcula
tion for the poor •Finance insurance through credit partners
& Micro Credit Foundation of India
Around 250,000 lives in the process of being covered for Natural Death and Perso
nal Accident
MicroFinance Globally and Some Models
Microfinance Globally
•Micro finance dates backs hundred of years •Scottish Widows assurance company in Sc
otland •United Nations micro finance program in Africa •Grameen Bank Bangladesh