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Need for MicroFinance

Evolution of Microfinance in
• Microfinance has been in practice for ages
( though informally).
• Legal framework for establishing the co-
operative movement set up in 1904.
• Reserve Bank of India Act, 1934 provided for
the establishment of the Agricultural Credit
• 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 on-
lending 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
• 87 % have no access to credit from formal
• 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

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
• Better balance sheets
– More assets
– Secure stores of value
• More profitable economic
• More productive savings
Constraints to scaling access for the
Asymmetry High Costs of Intermediation
• Low value, high volume transactions
• Inability of the poor
• High Transaction Costs (8-20%)
to offer collateral
• Low use of technology
• No credit history
• High supervision costs
available • High cash handling costs
• Potential success of
enterprises difficult to

Provision of Poorly
microfinance is functioning Markets
constrained by…
Regulatory Issues

Staff Incentives within organisations

not aligned to maximise access to
financial services for poor

Microfinance: An Overview

Financial Intermediation Models

ICICI Bank’s Approach

Global Remittance model

– Promotion of Self Help Groups
– Leveraging upon the merger with the
Rural Banking institution Bank of Madura


– With Micro-Finance Institutions

Traditional models lack
SHG-Bank Linkage Bank-MFI Linkage

Bank Bank



• Branches assess credibility of each • Bank on lends to M FI s based on

SHG and monitor repayment process their capital
• Group formation by NGOs
Hence,the ICICI Bank Partnership
 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
 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
Structure  MFI continues to collect
receivables from the borrowers
 MFI equity leverage reduced
enabling it to originate further

 MFI provides ICICI a credit

enhancement in the form of a
 FLDG is based on expected losses
Credit in the loan portfolio
Enhancement  Detailed study of past portfolio
data conducted to arrive at
expected loss rates

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

Access to equity capital at

both at the start –up stage Community
ICICI as well as for growth based
Bank financial
Initiatives institutions

Financial engineering and

product development

Links with capital markets

as the entities mature
Developing a network of community based financial institutions
Critical Initiatives
Steps Required Initiatives
Initiatives of ICICIBank
of ICICI Bank
Venture capital funds Tie up with Bellwether Microfinance Fund,
for MFIs Avishkar-Goodwell Fund & Lok Capital Fund

Specialized Institutions for research Creation of the Centre for Micro Finance,
training and product design capabilities Centre for Insurance & Risk Management
at IFMR, Chennai

Specialized institutions for providing Launch of the MFI Strategy Unit with the
consulting services to MFIs Centre for Micro Finance at IFMR, Chennai

Specialized institutions providing Launch of FINO;

technological solutions and 20% stake of ICICI Bank in FINO
services to finance providers

Access to Manpower Launch of

Dedicated Microfinance
Development Team
Creating specialized network organizations to build links between the poor & large

Areas Initiatives of ICICI Bank

Building bridges between the artisans and main
Handicrafts 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

Forging relationship with all stake holders in skills

Skills Training & Job Placements Training and Employment
Gram IT (Rural BPO Model) by Byrraju
Village Based Business Foundation being supported by ICICI Bank
Process Outsourcing
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 ICICI Bank’s Creation of ‘Centre for

Strategy Group’ Development Finance’ at IFMR

Placement of highly trained persons Conceptualizing Development Strategy

in each NWS clusters of ICICI Bank for Krishna District using the concept of
Charged with the responsibility for ‘Growth Diagnostic’ & ‘Prioritization Framework’;
Identifying and developing partnerships study to be replicated in other districts of India
with government and private bodies (one of the projects of CDF in collaboration
with ICICI bank)
• ICICI Bank has been following the
existing micro finance models
• In addition, ICICI Bank has been
expanding its microcredit portfolio
– Partnership model
– Portfolio buyouts
…a steady growth in group lending 15,09
through MFIs continues 12,32



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Rs. in
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Micro Savings Account
• Low value savings and deposits
• Addressing the needs of
– Small & Marginal Farmers/ Daily Wage
– Medium Farmers/ Entrepreneurs/
• Features
– Zero balance account
Business Correspondent
An intermediary of Bank in providing financial and
banking services

Services being provided

Small value deposits (savings, recurring & fixed
Disbursal and recovery of small value loans
Receipt and delivery of small value remittances

Who can be a Business Correspondent

Co-operative Societies
Sec 25 companies
Technology Used in BC
Transaction card
Customer ( 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
• Increased Flexibility: Customer Mobility
• Lower Operating Costs: Mibanco (Peru)
reduced it’s Loan Origination cost by
10% by streamlining it’s Loan Approval
• 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
ICICI Venture Capital
Venture Capital
• Private equity capital provided by
professional investors to new growth
• High-risk investments
• Potential for above average returns
• Popular among new companies who
cannot raise funds through debt
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
• 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

Agri - Farmer Service Centres
• FSC provides one stop solution to the
– 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

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

Innovations in Delivery
• Sustainable Access for Rural India (SARI)
– 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
– Providing e-governance, communication and
information services
• Possibility of delivering banking services

Future Initiatives and
• 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
Smart Card Based Payment

Smart Cards … An
• 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

Future Initiatives and
• 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
– 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
Production Output Risks
Controllable Risks

Pest and
Improper Policy Risk


Price 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

•Scottish Widows assurance company in


•United Nations micro finance program in


•Grameen Bank Bangladesh