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Microfinance & ICICIBank

June 2007

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Agenda

Microfinance Institutions (MFIs)

Microfinance Institutions (MFIs)

Way Forward

Way Forward

Financial Intermediation Models

Financial Intermediation Models

Microfinance: An Overview

Microfinance: An Overview

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Staff Incentives within organisationsnot aligned to maximise access to

financial services for poor

InformationAsymmetry

Inability of the poorto offer collateral

No credit historyavailable

Potential success of

enterprises difficultto evaluate

High Costs of Intermediation

Low value, high volumetransactions

High Transaction Costs (8-20%) Low use of technology High supervision costs High cash handling costs

RegulatoryIssues

RegulatoryIssues

Poorlyfunctioning Markets

Provision ofmicrofinance

is constrainedby

Provision ofmicrofinance

is constrainedby

Constraints to scaling

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Agenda

Microfinance Institutions (MFIs)

Microfinance Institutions (MFIs)

MFIs Financial Intermediation Models

MFIs Financial Intermediation Models

Way Forward

Way Forward

Microfinance: An Overview

Microfinance: An Overview

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Microfinance Institutions (MFIs)

Cooperatives/MACs/federations

Typical MicroFinance Institutions (MFIs)

Multiservice NGOs & SHPIs - under NABARDs SHG

Bank linkage

following variousdelivery

(i) Group delivery models

- SHGs

- JLGs

(ii) Individual banking

(iii) Adaptations of above

Registered as

- Societies

- Trusts

- Section 25, not for

profits

- NBFCs

- Others

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Self Help Group (SHG) - Model Affinity group of 10-20 members

Weekly group meetings

Leader elected by group members

Small and regular savings

Group has a savings bank account operated by grouprepresentative

Internal lending to members from own savings

External loan to the Group as a whole

Disbursement of loans to members at the discretion ofgroup

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Joint Liability Group (JLG) Grameen Model

5 member Joint liabilityGroups

40 member centers

Weekly group meetings

Established methodologyfor

Client screening

Group recognition

Loan sanctioning

Collections

Collections enforcedthrough

Joint liability

Peer pressure

One time membership fee

*Photograph: Swayam Krushi Sangam,Hyderabad

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Agenda

Microfinance Institutions (MFIs)Microfinance Institutions (MFIs)

MFIs Financial Intermediation ModelsMFIs Financial Intermediation Models

Way ForwardWay Forward

Microfinance: An OverviewMicrofinance: An Overview

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Hence, the ICICI BankPartnership

Provider of loan funds,mezzanine equity andtechnology

Lends directly to clientswith risk-sharing byNGO/MFI

Decides pricing and risksharing by NGO/MFI based

on historical data

Undertakes loanorigination, monitoringand collection

MFI provided OD limitby Bank equivalent toamount of risk sharing,which is drawn in event ofdefault upto specifiedlimit

Transfer of economiccapital from Bank to MFI

Structure separates risk of the MFI from riskof the portfolio

ICICI

Bank

MFIs

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CreditEnhancement

CreditEnhancement

StructureStructure

Moving on Buyouts:

ICICI Bank identifies portfolio

based on fulfillment of minimumcriteria and past portfolioperformance

MFI continues to collectreceivables from the borrowers

MFI equity leverage reducedenabling it to originate furtherassets

MFI provides ICICI a creditenhancement in the form of aFLDG

FLDG is based on expected lossesin the loan portfolio

Detailed study of past portfoliodata conducted to arrive atexpected loss rates

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Agenda

Microfinance Institutions (MFIs)Microfinance Institutions (MFIs)

MFIs Financial Intermediation ModelsMFIs Financial Intermediation Models

Way ForwardWay Forward

Microfinance: An OverviewMicrofinance: An Overview

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Very Few MFIsEconomically Backward

Low level of micro credit

penetration

Very Few MFIs

Economically Backward

Low level of micro credit

penetration

Large geographic asymmetries exist

Large no. of MFIs

Economically VibranHigh micro credit

penetration

Large no. of MFIs

Economically VibrantHigh micro credit

penetration

Requiresreduction ofgeographicasymmetries andincreasing depth

of outreach

Requiresreduction ofgeographicasymmetries andincreasing depthof outreach

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The Universe...The Universe...The Universe...

Different resources required at different

stages

READY TO LINK DEVELOPMENT

CONVERSION CREATION

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Building Blocks.

MFIMFI

ModelModelFundsFundsCapitalCapital

ManpowerManpowerTechnologyTechnologyTrainingTraining

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The Resources Required...

Funds and Capital through Banks and VCs

Technology Leveraging the developments

Human Resources

Training and Capacity Building for nascent MFIs

Manpower Requirement for bigger MFIs

Knowledge and InformationMentoring on advanced financial instruments

eg: Treasury Operations, ALM

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Finance bringing in riskequity

Initial investment by venture capitalists start ups.

Tie up with local venture capital firms. On-lending

funds available from ICICI Bank for building portfolio

Exit route - ICICI Bank provides long term debt

(quasi equity) to MFI to free up initial investments

Take out finance modelTake out finance model

Performance guarantees from corporates / banks

Guarantees leveraged 3 to 4 times Business planning and monitoring throughout the

loan period

Documentation support to MFIs

Guarantees leveragedGuarantees leveraged

i d

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Finance access to secondarymarkets

Creating intermediaryFinancial Institution to

provide assistance to

Indian MFIs

Enabling access of MFIs

to mainstream capital/

debt markets

Enhance resource flows

from commercial

banking sectorThe entity provides quasi equity, credit

enhancement and technical & financial

services to MFIs

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Operational processesOperational processes

Data recording system for start up MFIsBusiness process re-engineering for mature

MFIsInternal control and auditing systems for multi-

branch operations

Cash flow management

And supporting systems

TechnologyTechnology

Microbanking solutionFINO

Automation through card based solutions /handhelds

Evolution of banking interface of MFIs

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Human Resources

Fresh passoutsFresh passouts

LateralLateral

Microfinancejobs.com

Head hunters for senior levelrecruitment

Building a pipelineBuilding a pipeline

Campus recruitments from

institutions in MFI commandarea

Induction into MFI operations Working with Universities,

local institutes for specificcourse in MF

Content development Tie up with institutes like NIIT

and APTECH for FINO training

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Enhancing Skills

Client assessment Accounting and financial analysisManagement of information Process flow and monitoring Internal control

Market researchClient needs assessment and hybrid product

design

Staff SkillsStaff Skills

Product developmentProduct development

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Building Capacities

MentoringMentoring

Corporate governance ICICI Bankvolunteering

Centre for Microfinance Research

Impact assesmentInnovative productsResearch - collaboration with international

universitiesAdvance financial training for senior

management of MFIs

Integrated support structure under IFMR TrustInitiatives promoting long term sectoral growth

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Beyond Microcredit

Need for Diversification in the sector

Microcredit just the starting point

Larger suite of financial services - Insurance,Savings and Remittances

To provide these services there is a need to have a:

A clear understanding of the CUSTOMER and

Technology that enables the delivery CHANNEL

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Thank you