ICICI Bank in Micro-finance: Breaking the barriers

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ICICI Bank in Micro-finance Breaking the barriers
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Partnership Model Joining Hands to Scale up
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Forging long term synergies

• MFIs
• Single product
• Single customer segment
• Knowledge of local area
• Poor included

• Banks
• Multiple products
• Large customer variety
• Large risk apetite
• Poor / Vulnerable excluded

• Partnership
• Multiple products
• Multiple segments
• Large risk appetite combined with knowledge of
  local area
• Poor / Vulnerable included

Balance sheet risk separated from business risk
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Partnership Model

• Provides loan funds, mezzanine equity and
  technology
• Lends directly to clients with risk sharing by
  NGO / MFI
• Decides pricing and risk sharing on historical
  data

Bank

• Undertakes loan origination, monitoring and
  collection
• Offers First Loss Deficiency Guarantee (FLDG)
• FLDG assumes character of mezzanine equity

NGO/MFI
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The Partnership Modelkey 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

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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

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Securitization Creating a Secondary Market for
Micro-finance
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Securitization
Structure

• 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

Credit Enhancement

• 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 Client needs
  assessment and hybrid product design

Mainstreaming Micro-finance
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In collaboration with microfinance partners we
offer customized products
Financial services that respond to low income
clients
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Supported by insurance initiatives

• Life Insurance
• Micro insurance MFIs
• Retail products Individuals
• High net worth clients

• Non - Life Insurance
• Weather risk
• Cash in transit
• Accident
• Theft
• Fire
• Critical illness
• Motor vehicles

Protecting the loan portfolio..
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a steady growth continues
321.0
143.5
40.4
14.7
4.4
US in million
Mar02
Mar03
Mar04
Mar05
Mar06
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But, large geographic asymmetries exist

• 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
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Thus the need for institution building

• Venture capital for start ups
• On lending funds

• Shared technology platform
• Smart cards biometric authentication

Systems

• Entrepreneur development
• Staff Skills
• Mentoring
• Large professional personnel requirement

Capacities
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Finance bringing in risk equity
Take out finance model

• Initial investment by venture capitalists start
  ups.
• Tie up with three local venture capital firms
  focusing on microfinance
• On-lending funds available from ICICI Bank under
  partnership model for building portfolio
• Exit route - ICICI Bank provides long term
  subordinated debt (quasi equity) to MFI to free
  up initial investments
• Projected RoI gt 15.5 p.a.
• Social performance of capital

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Finance
Guarantees leveraged

• Performance guarantees from corporates / banks
• Guarantees leveraged 3 to 4 times
• Business planning and monitoring throughout the
  loan period
• Documentation support to MFIs

Takes care of External Commercial Borrowing
restrictions
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Finance access to secondary markets

• 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

The entity provides quasi equity, credit
enhancement and technical financial services to
MFIs
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And supporting systems
Operational proceses

• Data recording system for start up MFIs
• Business process reengineering for mature MFIs
• Internal control and auditing sytems for
  multibranch operations
• Cash flow management

Technology

• Microbanking solution
• Automation through card based solutions /
  handhelds
• Evolution of banking interface of MFIs

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Evolution of the Banking Interface of MFIs
Validation In person physical validation at
base branch Record Updation Manually at the
base branch
Validation In person at branch, limited risk
was taken at non-base branch Record Updation
Computerized through a data interchange
Computerised Branches
Validation TPIN ATM PIN Login ID
password Record Updation Computerized through a
secure client application into a central backend
Networked MFI Branches
?
Need to leverage multiple interfaces available to
access the databaseSimputers, Mobile, Cards
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And enhancing capacities
Staff Skills

• Accounting and financial analysis
• Management of information
• Process flow and monitoring
• Internal control

Support from MicroSave India
Product development

• Market research
• Client needs assessment and hybrid product design

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Enhancing capacities
Mentoring

• Corporate governance ICICI Bank volunteering
• Resource centers 6 across the country
• (partnering with BASIX and CARE, India)
• Centre for Microfinance Research
• Impact assesment
• Innovative products
• Research - collaboration with international
  universities
• Advance financial training for senior management
  of MFIs

Initiatives promoting long term sectoral growth
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Way forward

• Market research based channels and products
• An inclusive banking paradigm
• Access to the credit worthy credit bureau in
  place
• Linkage with capital markets mainstreaming

40,000 kiosks
130,000 villages
200 MFIs
40 million clients
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Towards a larger dream
MFI/NGO/Kiosks
Creation of Wealth
Disadvantaged Population
...For All!
Commercial Banks/ Regulatory Authorities