ICICI Bank in Micro finance: Breaking the barriers

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Partnership Model: Joining Hands to Scale up

Forging long term synergies…

3 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

Bank

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Provides loan funds, mezzanine equity and technology

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Lends directly to clients with risk sharing by NGO / MFI

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Decides pricing and risk sharing on historical data NGO/MFI

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Undertakes loan origination, monitoring and collection

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Offers First Loss Deficiency Guarantee (FLDG)

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FLDG assumes character of mezzanine equity

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The Partnership Model –key differentiators

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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

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Transition from based lending’ ‘lending to organisation’ to ‘asset ROE of intermediary significantly improves with portfolio quality remaining unchanged

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Scope for leverage of 10-12 times compared to 2-3 times previously

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Partnership proposition Model: A Win-Win

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Marries the core competence of NGOs/MFIs with that of banks

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Social mobilization skills with finance

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Lending directly to the borrowers through innovative channels

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Model overcomes constraints of

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NGOs: Complete dependence on donor funding

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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

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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

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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

In collaboration with microfinance partners we offer customized products… Service

• Rapid, convenient access • Respect, connection

Asset building, risk mitigating products

• Micro savings • Life and non-life insurance

What low income clients want?

Flexible loans

• Small initial sizes • Larger subsequent loans • Longer terms

Variety of products

• Income generation loans • Housing loans • Emergency loans

Group based Individual loans No traditional collateral

Financial services that respond to low income clients

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Supported by insurance initiatives

Life Insurance

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Micro insurance – MFIs

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Retail products – Individuals

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High net worth clients Non - Life Insurance

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Weather risk

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Cash in transit

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Accident

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Theft

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Fire

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Critical illness

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Motor vehicles

Protecting the loan portfolio…..

…a steady growth continues

321.0

143.5

40.4

4.4

US$ in million Mar’02

14.7

Mar’03 Mar’04 Mar’05 Mar’06

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But, large geographic asymmetries exist…

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Very Few MFIs

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Economically Backward

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Low level of micro credit penetration …Requires reduction of geographic asymmetries and increasing depth of outreach…

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Large no. of MFIs

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Economically Vibrant

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High micro credit penetration

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Thus the need for institution building… Finance Systems Capacities

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Venture capital for start ups On lending funds

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Shared technology platform Smart cards – biometric authentication

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Entrepreneur development Staff Skills Mentoring Large professional personnel requirement

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Finance – bringing in risk equity

Take out finance model

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Initial investment by venture capitalists – start ups. Tie up with three local venture capital firms focusing on

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microfinance On-lending funds available from ICICI Bank under

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partnership model for building portfolio Exit route - ICICI Bank provides long term subordinated

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debt (quasi equity) to MFI to free up initial investments Projected RoI > 15.5% p.a.

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Social performance of capital

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Finance…

Guarantees leveraged

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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

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Creating intermediary Financial Institution to provide assistance to Indian MFIs

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Enabling access of MFIs to mainstream capital/ debt markets

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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

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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

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

Evolution of the Banking Interface of MFIs Branch 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

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Need to leverage multiple interfaces available to access the database…Simputers, Mobile, Cards

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And enhancing capacities…

Staff Skills

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

Support from MicroSave – India

Product development

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Market research Client needs assessment and hybrid product design

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Enhancing capacities…

Mentoring

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Corporate governance – ICICI Bank volunteering Resource centers – 6 across the country (partnering with BASIX and CARE, India) Centre for Microfinance Research

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Impact assesment

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Innovative products

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Research - collaboration with international universities

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Advance financial training for senior management of MFIs

Initiatives promoting long term sectoral growth…

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Way forward…

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Market research based channels and products An inclusive banking paradigm Access to the credit worthy – credit bureau in place Linkage with capital markets – mainstreaming 200 MFIs 40,000 kiosks 130,000 villages 40 million clients

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Towards a larger dream…

MFI/NGO/Kiosks Population ...For All!

Commercial Banks/ Regulatory Authorities