Microfinance & ICICI

Bank

June 2007
Agenda

Microfinance:
Microfinance: An
An Overview
Overview

Microfinance
Microfinance Institutions
Institutions (MFIs)
(MFIs)

Financial
Financial Intermediation
Intermediation Models
Models

Way
Way Forward
Forward
 Microfinance vs Microlending
“Poor people borrow some of the time but save all of the
time”

Entrepreneurial Poor
Entrepreneuri People who are slightly below the
al Poor
credit insurance poverty line.
Self-Employed Poor
Self Employed Poor people who are meeting their
Poor
basic needs by running
microbusinesses
savings Laboring Poor
Laboring Poor
Farm laborers, domestics and
unemployed workers
Very Poor
Very Poor People who have few (if any)
assets – very limited chances to
earn money
The Poverty Pyramid

The need of customer is more than credit….

*Source: FINCA’s Poverty Pyramid

 Constraints to scaling
Information High Costs of Intermediation
Asymmetry • Low value, high volume
• Inability of the poor
transactions
to offer collateral • High Transaction Costs (8-20%)
• No credit history • Low use of technology
available • High supervision costs
• Potential success of • High cash handling costs
enterprises difficult
to evaluate

Provision
Provision of
of Poorly
microfinance
microfinance functioning Markets
is
is constrained
constrained
by… Regulatory
Regulatory
by…
Issues
Issues
Staff Incentives within organisations
not aligned to maximise access to
financial services for poor
Agenda

Microfinance:
Microfinance: An
An Overview
Overview

Microfinance
Microfinance Institutions
Institutions (MFIs)
(MFIs)

MFIs
MFIs –– Financial
Financial Intermediation
Intermediation Models
Models

Way
Way Forward
Forward
Microfinance Institutions (MFIs)
Multiservice NGOs & SHPIs - under NABARD’s SHG
Bank linkage

Cooperatives/MACs/federations

Typical MicroFinance Institutions (MFIs)

following various Registered as

delivery - Societies
(i) Group delivery models - Trusts
- SHGs - Section 25, not for
- JLGs profits

(ii) Individual banking - NBFCs

(iii) Adaptations of above - Others

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 group
representative
 Internal lending to members from own savings
 External loan to the Group as a whole
 Disbursement of loans to members at the discretion of
group
Joint Liability Group (JLG) –
Grameen Model
 5 member Joint liability
Groups
 40 member centers
 Weekly group meetings
 Established methodology
for
 Client screening
 Group recognition
 Loan sanctioning
 Collections
 Collections enforced *Photograph: Swayam Krushi Sangam,
Hyderabad
through
 Joint liability
 Peer pressure
 One time membership fee
Agenda

Microfinance:
Microfinance: An
An Overview
Overview

Microfinance
Microfinance Institutions
Institutions (MFIs)
(MFIs)

MFIs
MFIs –– Financial
Financial Intermediation
Intermediation Models
Models

Way
Way Forward
Forward
 Traditional models lack
scalability…
SHG-Bank
SHG-BankLinkage
Linkage Bank-MFI
Bank-MFILinkage
Linkage

Bank
Bank Bank
Bank

Branch
Branch MFI
MFI
NGO

SHG
SHG Ind./SHG/JLG
Ind./SHG/JLG

••Branches
Branches assess
assess credibility
credibility ••Bank
Bank on
on lends
lends to
to MFIs
MFIs
of
of each
each SHG
SHG and
and monitor
monitor based
based on
on their
their capital
capital
repayment
repayment process
process
••Group
Group formation
formation by
by NGOs
NGOs
 Hence, the ICICI Bank
Partnership
ICICI
MFIs
Bank
 Provider of loan funds,  Undertakes loan
mezzanine equity and origination, monitoring
technology and collection
 Lends directly to clients  MFI provided OD limit
with risk-sharing by by Bank equivalent to
NGO/MFI amount of risk sharing,
which is drawn in event of
 Decides pricing and risk
default upto specified
sharing by NGO/MFI based limit
on historical data
 Transfer of economic
capital from Bank to MFI
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
Structure
Structure  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
Credit
Credit  FLDG is based on expected losses
in the loan portfolio
Enhancement
Enhancement  Detailed study of past portfolio
data conducted to arrive at
expected loss rates
Agenda

Microfinance:
Microfinance: An
An Overview
Overview

Microfinance
Microfinance Institutions
Institutions (MFIs)
(MFIs)

MFIs
MFIs –– Financial
Financial Intermediation
Intermediation Models
Models

Way
Way Forward
Forward
 Large geographic asymmetries exist…

Very
 VeryFew
FewMFIs
MFIs
Economically
 EconomicallyBackward
Backward
Low
 Lowlevel
levelof
ofmicro
microcredit
credit
penetration
penetration

Large
 Largeno.
no.of
ofMFIs
MFIs
…Requires
…Requires Economically
 EconomicallyVibrant
Vibrant
reduction
reduction of
of High
 Highmicro
microcredit
credit
geographic
geographic penetration
penetration
asymmetries
asymmetries and
and
increasing
increasing depth
depth
of
of outreach…
outreach…
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The Universe...

READY TO LINK DEVELOPMENT

CONVERSION CREATION

Different resources required at different

stages
Building Blocks….

Capital
Capital Funds
Funds Model
Model

MFI
MFI

Training
Training Technology
Technology Manpower
Manpower
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 Information
 Mentoring on advanced financial instruments
eg: Treasury Operations, ALM
 Finance – bringing in risk
equity
Take
Take out
out finance
finance model
model
 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

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

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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
The entity providesbanking
quasi sector
equity, credit
enhancement and technical & financial
services to MFIs

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 And supporting systems…
Operational
Operational processes
processes
 Data recording system for start up MFIs
 Business process re-engineering for mature
MFIs
 Internal control and auditing systems for multi-
branch operations
 Cash flow management
Technology
Technology
 Microbanking solution
 FINO
 Automation through card based solutions /
handhelds
 Evolution of banking interface of MFIs

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 Human Resources…

 Microfinancejobs.com
Lateral  Head hunters for senior level
Lateral recruitment

 Campus recruitments from

Fresh
Fresh passouts
passouts institutions in MFI command
area
 Induction into MFI operations
 Working with Universities,
local institutes for specific
Building
Building aa pipeline
pipeline course in MF
 Content development
 Tie up with institutes like NIIT
and APTECH for FINO training

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 Enhancing Skills…
Staff
Staff Skills
Skills
 Client assessment
 Accounting and financial analysis
 Management of information
 Process flow and monitoring
 Internal control

Product
Product development
development
 Market research
 Client needs assessment and hybrid product
design

22
 Building Capacities…
Mentoring
Mentoring
 Corporate governance – ICICI Bank
volunteering

 Centre for Microfinance Research

Impact assesment
Innovative products
Research - collaboration with international
universities
Advance financial training for senior
management of MFIs

Initiatives promoting
 Integrated long
support term sectoral
structure under growth…
IFMR Trust

23
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
 Thank you

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