Microfinance

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 established as an apex agency for rural finance in 1982. • Passing of Mutually Aided Co-op. Act in AP in

Considerable gap between demand and supply for all financial services Majority of poor are excluded from financial services. This is due to, the following reasons 5. Bankers feel that it is fraught with risks and uncertainties. 6. High transaction costs 7. Unfavourable policies like caps on interest rates which effectively 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 of an appropriate legal vehicle 3. Limited access to equity 4. Difficulty in accessing low cost onlending funds (as of now they are unable to offer savings services in a legitimate manner.

• Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio, MIS, and the sustainability of operations. • About 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. • Less than 15 % of the households have any kind of insurance. • Negligible numbers have 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 South India • 600 MFI initiatives have a cumulative outreach of 1.25 crore poor hoseholds • NABARD’s bank linkage program has cumulatively reached a total of 9.4 lakh SHGs 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 history 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 financial 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 13

Traditional models lack scalability… SHG-Bank Linkage

Bank-MFI Linkage

Bank

Bank

Branch

MFI NGO

SHG

• Branches assess credibility of each

SHG and monitor repayment process

• Group formation by NGOs

Ind./SHG/JLG

• Bank on lends to M FI s based on their capital

Hence,the ICICI Bank Partnership ICICI Bank

MFIs



Provider of loan funds, mezzanine equity and technology



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





Decides pricing and risk sharing by NGO/MFI based 

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 upto specified limit 

Transfer of economic

Structure separates risk of the MFI from risk of the portfolio

Moving on – Buyouts: 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 

Structure

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 

Credit Enhancement

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  Linking 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 Institutions Financial resources for on-lending

ICICI Bank Initiatives

Access to equity capital at both at the start –up stage as well as for growth

Financial engineering and product development

Links with capital markets as the entities mature

Community based financial institutions

Developing a network of community based financial institutions Critical Initiatives Steps Required

Initiatives ICICIBank Bank Initiatives of of ICICI

Venture capital funds for MFIs

Tie up with Bellwether Microfinance Fund, Avishkar-Goodwell Fund & Lok Capital Fund

Specialized Institutions for research training and product design capabilities

Creation of the Centre for Micro Finance, Centre for Insurance & Risk Management at IFMR, Chennai

Specialized institutions for providing consulting services to MFIs

Launch of the MFI Strategy Unit with the Centre for Micro Finance at IFMR, Chennai

Specialized institutions providing technological solutions and services to finance providers

Launch of FINO; 20% stake of ICICI Bank in FINO

Access to Manpower

Launch of MicrofinanceJobs.com

Dedicated Microfinance Development Team

Creating specialized network organizations to build links between the poor & large Areas

Initiatives of ICICI Bank

Handicrafts

Building bridges between the artisans and main stream markets (Sandhi (NGO))

Foods

Exploring ways to fill the gaps in value chain of food produce in collaboration with MFIs/NGOs

Village Based Tourism

Exploring ways to support such tourism projects

Skills Training & Job Placements

Forging relationship with all stake holders in skills Training and Employment

Village Based Business Process Outsourcing

Gram IT (Rural BPO Model) by Byrraju Foundation being supported by ICICI Bank

Requires working in close collaboration with state, district and local level government and private organizations

Health and Education related initiatives of SIG

Creation of ‘Development Strategy Group’

Placement of highly trained persons in each NWS clusters of ICICI Bank Charged with the responsibility for Identifying and developing partnerships with government and private bodies

ICICI Bank’s Initiatives

Creation of ‘Centre for Development Finance’ at IFMR

Conceptualizing Development Strategy for Krishna District using the concept of ‘Growth Diagnostic’ & ‘Prioritization Framework’; study to be replicated in other districts 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, ICICI Bank has been expanding its microcredit portfolio through – Partnership model – Portfolio buyouts

…a steady growth in group lending through MFIs continues 12,32

15,09 6

5

4240

1100

Rs. in millio n

120

440

Mar’0 2

Mar’0 3

Mar’0 4

Mar’0 5

Mar’

Mar’

Micro Savings Account • Low value savings and deposits product • Addressing the needs of – Small & Marginal Farmers/ Daily Wage Earners – Medium Farmers/ Entrepreneurs/ Salaried

• Features – Zero balance account

Business Correspondent (BC) An intermediary of Bank in providing financial and banking services

Services being provided Small value deposits (savings, recurring & fixed deposits) Disbursal and recovery of small value loans Receipt and delivery of small value remittances Who can be a Business Correspondent MFIs/ NGOs Co-operative Societies Sec 25 companies

Technology Used in BC Customer

Business Corresponde nt

Bank

Transaction card ( Smart Card )

Authentication Device (AD)

Core Banking Solution (CBS)

Technologies in Microfinance What Technologies? • Information Systems (IS) Tech:Custom built IS s/w to track Fin Transactions and create Reports for Management, Donors and Regulators • Large MFIs n Banks use ATMs, POS(Point Of Sale n/w) and Mobile Phone banking. Eg SKS using 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 process. 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 businesses. • 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 this 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 to 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 • Aavishkar provides micro-equity funding of $25000 to $100000

Other Initiatives

Agri - Micro-credit initiatives • Innovative structure for micro-credit in rural areas – Overcome the reach problem – Lower administration costs

• Channels for delivering micro-credit – – – –

Sugar companies Seed producers Input companies NGOs and micro credit institutions

These channels help build volumes, reduce costs and monitor credit risk 38

Agri - Farmer Service Centres (FSCs)

• FSC provides one stop solution to the farmer – – – – –

Agri extension support Inputs and other services Credit Market linkage Rural infrastructure

• These FSCs are promoted by Agri Input suppliers , and avoids duplication of efforts by different 39

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Social Initiatives ICICIcommunities

• 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 towards Gujarat Earthquake

• Shop the Cause: On-line shopping mall – Over 100 exquisite hand crafted products available

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Innovations in Delivery Channels • Sustainable Access for Rural India (SARI) project

– Partners: MIT Media Labs, Harvard University, IIT-Chennai, I-Gyan, DHAN Foundation, 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 42

Future Initiatives and Products • Rural ATM Machine – Currently in development in the lab of Dr.Ashok Jhunjhunwala

• Mobile ATM – To be installed in ICICI-branded trucks that would circulate in a number of villages

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 activities

• Derivatives – Many farmers already involved in informal derivative dealing by buying and selling crop futures

Weather Insurance: Covers Risks beyond the Customers’ Control

Controllable Risks

Production Risks

Output Risks

Pest and Improper Cultivation Spurious Inputs

Price Risk

Policy Risk

Customization of Insurance Products •I ntegrated product offering – Life and General insurance •Simplified premium calculation 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 Personal Accident

MicroFinance Globally and Some Models

Microfinance Globally •Micro finance dates backs hundred of years •Scottish Widows assurance company in Scotland •United Nations micro finance program in Africa •Grameen Bank Bangladesh