ICICI Bank in Micro-finance: Breaking the barriers

2

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

Provides loan funds, mezzanine equity and technologyLends directly to clients with risk sharing by NGO / MFIDecides pricing and risk sharing on historical data

BankBank

NGO/MFINGO/MFI

Partnership Model

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The Partnership Model–key 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…

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

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

Structure

Credit Enhancement

Mainstreaming Micro-finance

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In collaboration with microfinance partners we offer customized products…

What low income

clients want?

Service•Rapid, convenient access•Respect, connection

Flexible loans•Small initial sizes•Larger subsequent loans•Longer terms

Variety of products•Income generation loans•Housing loans•Emergency loans

Asset building, risk mitigating products•Micro savings•Life and non-life insurance

No traditional collateral

Group based

Individual loans

Financial services that respond to low income clients

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Supported by insurance initiatives

Life InsuranceLife Insurance

Micro insurance – MFIs

Retail products – Individuals

High net worth clients

Life InsuranceLife Insurance

Micro insurance – MFIs

Retail products – Individuals

High net worth clients

Protecting the loan portfolio…..

Non - Life InsuranceNon - Life Insurance

Weather risk

Cash in transit

Accident

Theft

Fire

Critical illness

Motor vehicles

Non - Life InsuranceNon - Life Insurance

Weather risk

Cash in transit

Accident

Theft

Fire

Critical illness

Motor vehicles

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…a steady growth continues

Mar’02

Mar’03

Mar’04

Mar’05

143.5

14.74.4

40.4

US$ in million

321.0

Mar’06

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Very Few MFIsEconomically BackwardLow level of micro credit penetration

Very Few MFIsEconomically BackwardLow level of micro credit penetration

But, large geographic asymmetries exist…

Large no. of MFIsEconomically VibrantHigh micro credit penetration

Large no. of MFIsEconomically VibrantHigh micro credit penetration

…Requires reduction of geographic asymmetries and increasing depth of outreach…

…Requires reduction of geographic asymmetries and increasing depth of outreach…

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SystemsSystems

FinanceFinance

Thus the need for institution building…

Venture capital for start ups On lending funds

CapacitiesCapacities

Shared technology platform Smart cards – biometric

authentication

Entrepreneur development Staff Skills Mentoring Large professional personnel

requirement

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Finance – bringing in risk equity

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 > 15.5% p.a. Social performance of capital

Take out finance modelTake out finance model

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Guarantees leveragedGuarantees 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…

Finance…

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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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Operational procesesOperational 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

And supporting systems…

TechnologyTechnology

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

Branch

ComputerisedBranches

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

Validation : TPIN; ATM PIN; Login ID & password

Record Updation : Computerized through a secure client application into a central backend

NetworkedMFI Branches

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

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And enhancing capacities…

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

Market research Client needs assessment and hybrid product design

Staff SkillsStaff Skills

Product development Product development

Support from MicroSave – India

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Enhancing capacities…

MentoringMentoring 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 kiosks130,000 villages

200 MFIs40 million

clients

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Disadvantaged

Population

Towards a larger dream…

MFI/NGO/Kiosks

Commercial Banks/ Regulatory Authorities

Creation of Wealth

...For All!