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					Commercial Banks &
Linkages with MFIs


29 August, 2005
    Agenda

      Financial Market in India



      ICICI Group



      Microfinance in India



      The way ahead




2
    India
       Largest democracy in the world
          1 billion strong consumers
       Fourth largest economy & tenth most industrialized
          Projected to grow larger than Italy, France, Germany and
           Japan in 30 years
       One of the fastest growing economies
          at 8.5% in FY 04, 7% in FY05 and 7.25% (E) in FY 06
       Abundant skilled manpower
       One of the most liberal FDI regime
       AT Kearney:
          third most attractive investment destination
          best BPO destination
       Sixth largest forex reserves in the world at USD 140 bn



3
    Vast credit opportunity

                                                          Domestic credit as a % of GDP
    200
             153         150
    160                               138   136
                                                          114              103
    120
                                                                                           77
     80
     40                                                                                             30

      0
                                      HK




                                                           A ust ral i a
                          T ai w an
               Chi na




                                                                                                    I nd i a
                                                                                           Ko rea
                                            M al aysi a




    Source: Reserve Bank of India                                          Si ng ap o re

4
    Financial Market in India

       Microfinance: Financial             FINANCIAL SECTOR
        services for poor and low-
        income people                     RURAL FINANCE

       Rural finance: Financial
        services used in rural         AGRICULTURAL
        areas by people of all         FINANCE            MICROFINANCE
        income levels
       Agricultural finance:
        Financing of agriculture-
        related activities

    Financial services for the rural poor: Financial services for
    all purposes and from diverse sources tailored to the needs of
    poor people in rural areas.


5
    Agenda

      Financial Market in India



      ICICI Group



      Microfinance in India



      The way ahead




6
    The ICICI Bank Growth Story

          1955                   1994                    1998                    2002
    Formation of ICICI                              Retail Finance          Merger of ICICI
                            Entry into Banking
        Limited                                        Started              and ICICI Bank

    Formed at the                                    Entered retail
    initiative of the                                finance
                                                                           Formation of the
    World Bank, Indian                              Retail loans – Auto   first universal bank
    Government and                                   loans, Home loans
                            ICICI Bank set up as                           in India
    representatives of                              Cards – Credit
    Indian industry         a wholly-owned
                                                     Card, Debit Card,
                            subsidiary to enter
                                                     Smart Card
    Objective was to        the area of
    create a                commercial banking                             Achieved market
    Development                                     First entity from      leadership in each
    Financial Institution                           India to be listed     of the product
    to provide project                              on NYSE                segment
    finance




7
         ICICI Group today – the first universal
         bank in India
          Retail Financial Services   Corporate Financial Services

            Car Loans                             Term Loans

          Mortgages                               Project Finance

       Credit Cards                               Commercial Bank

     Asset Mgmt                                      Investment Bank

Private banking                                      Venture Capital

     Life Insurance                                 Genl. Insurance

                                                  IT Services
           Web broking




 8
    The ICICI Group today
    Largest private sector bank in India

    Largest consumer credit provider in India

    Over 15 million retail customer accounts

    Largest private sector life and general insurer in India

    Building a global presence

    Largest rural and micro loans provider in the country

    Asset base of abt US$ 45 bn, PAT of about US$500 mn




9
     The vision of ICICI Bank is to increase
     the access to “All Financial Services”
     in rural India in a viable and
     sustainable manner.




10
     Touching Lives in Rural India
                                             FY06
                                 FY05
                                            Targets

          No. of customers      1,000,000   2,500,000

           No. of villages        17,000      60,000

          Points of contact        2,980       7,500

            No. of kiosks          2,000       4,000

        Current a/cs at Mandi
             branches              3,583      50,000

       Lives touched through     235,500    1,500,000
              Insurance




11
      Target Clients - People With Low Income &
      Expenses Levels
                                    Predominantly in rural areas
                                but also in semi-urban & urban areas


           Rich/
           SME
                                  Marked by low financial literacy

           Middle
           Class

                                      Mostly not reached by
       Low Income                     formal banking system



     economically at the Bottom of the Pyramid (BoP)


12
     Agenda

       Financial Market in India



       ICICI Group



       Microfinance in India



       The way ahead




13
     Rural banking in India

     Indian banking system has achieved a formidable
     outreach in rural areas

                    About 50% (32,538) of all scheduled commercial bank
                    branches are rural

                    31% (131 million) of the total deposit accounts are in
                    rural India

                    43% (22 million) of total credit accounts are in rural
                    India

                    Number of people per branch (rural) has reduced from
                    64,000 in June 1969 to 23,000 in 2001


     BSR, March, 2001, Reserve Bank of India
     Deolalkar, G.H., “The Indian Banking Sector: On the road to progress”
14
     However large gaps persist…

      For the poor population of 741 million

                        Population per branch: 23,000
                        Number of villages per branch: 19

      Penetration of savings accounts is below 18%
      (against 104% in urban and semi-urban areas)


                        High dependence on informal sources
                        36% of rural credit from informal sources
                        Even higher for lower income households: 78%

     BSR, March 31, 2001, Table 1.3, RBI
     Census, 2001
     Mahajan, Vijay”, BASIX, www.basixindia.com
15
      Banking with poor is challenging…

         Nature of Demand              Nature of Supply

     Doorstep      banking        High   cost of service delivery
     Flexibility   in timings     Timings  and procedures:
                                   Rigid and inflexible
     Timely    availability of
     services                      Expansion of branch
                                   network expensive and time
     Low  value and high volume
                                   taking
     transactions
                                   Hightransaction cost for the
     Require simple processes
                                   customers
     with minimum documentation

     …and conventional banking is not poised to meet
     these demands

16
     Micro Finance Providers
        Commercial Banks & RRBs
        Dist level Co-op Banks & Primary Agricultural
         Credit Societies (PACS)
        Thrift Societies & Co-operatives
        NGO/MFIs either directly or through SHG Bank
         Linkage
        Informal Sources – Money lenders, Family or
         Friends




17
     Micro Finance Models
        The Self-Help Group (SHG) Bank Linkage
         Model

        Financial Intermediation by MFIs

        The Partnership Model – MFI as the
         Servicer




18
     Micro finance models
     Group based models that help address
     issues related to information asymmetry
           Self Help Groups

           Joint Liability Groups


     Local Financial Institutions that help
     reduce transaction costs.

           Financial Intermediation by LFI (MFIs)




19
     Differences in two Models
            SHG-Bank Linkage             Bank-MFI Linkage


                 Bank                         Bank


                Branch
                                               MFI
                         NGO

                 SHG                       Ind./SHG/JLG



• Branches assess credibility of • Bank onlends to MFIs based
  each SHG and monitor repayment   on their capital
  process
• Group formation by NGOs

22
     Challenges in these Models

        Heavy dependence on Grant/donor based
         funds

        Scalability dependent on Capital of MFI

        No incentive to SHPI once SHG is linked to
         the Bank hence no focus on capacity
         building




23
      An Innovative Strategy


Conventional                   Manpower     Channel     Single
                  Branch                               Product
Rural Banking     based        intensive     driven     focus




                               Technology   Customer    Multiple
                Entrepreneur                            Product
Our strategy       based        intensive    driven    approach




 24
     Partnership Model: Joining Hands to
                  Scale up




25
     The Partnership Model
        Leveraging on strengths of partners viz.
         Bank and MFI
        Separating risk of MFI from risk of
         portfolio
        Enables rapid scalability
        Build up of Tier 1 capital by MFIs over a
         period
        Handholding and Capacity Building




26
     Methodology
        Loan contracts directly between Bank and
         Borrower

        Alignment of incentives with a first loss
         guarantee structure

        Transfer of implicit capital to MFI through
         overdraft facility




27
     Securitization
      Assets created through partnership model
      Advantage of differentiating between the
       financial and operational risk of the MFI
      Past portfolio performance and expected
       loss rates
      Quality of the governance, management,
       operating and management information
       systems of the MFI




28
     On-tap Securitization

        ICICI Bank provides the MFI an Advance
         Purchase Consideration Limit with which the MFI
         can build assets
        Once created assets are assigned to ICICI Bank
        MFI can continue to build assets and assign to
         ICICI Bank on a regular basis


          MFIs are able to scale up their outreach while
              maintaining a healthy debt-equity ratio




29
     Showing the way…
        Potential of creating a large secondary market in
         India for micro-finance receivables
           Over 300 commercial and co-operative banks
            willing to purchase micro-finance receivables
           ICICI Bank is working with rating agencies for
            credit enhancing microfinance assets for better
            ratings
           Bonds may be issued against the securitized
            assets of micro-finance
        Offering insurance as a risk mitigant to take care
         of credit defaults
         ….by creating linkages for MFIs to capital markets


30
          ICICI Bank’s achievements in this field…
                                                            86.5
                                                                   42
         80                                                             40

         70                                                             35

         60                                     56.3   27               30

         50                      47.9                                   25
                     42.1
         40                                                             20

         30                                13                           15
                            10
        20                                                              10

        10                                                                5
                                                                        No. of
                                                                        partners
     Portfolio O/s    Mar’04      Jun’04        Sep’ 04      Feb’ 05
     (Million US$)




31
                       …have enabled credit access to a million
                       clients
                                                          1,000,000
                    900000

                    800000
Number of clients




                    700000

                    600000

                    500000
                                                344,570
                    400000

                    300000
                                      175,390
                    200000

                    100000   72,980


                             Mar’02   Mar’03    Mar’04     Mar’05



   32
          …and led to rapid expansion of the MFI
          industry
       150                                                  147.7
       140                                                          Growth   financed
       130                                                          mainly by ICICI Bank
       120
       110                                                          Lower transaction
       100                                         90.9             costs
        90
                                                                    No capital adequacy
        80
        70                                  57.1                    norms
                                     56.8
        60                                                          Unlimited access to
        50                  48.4
        40
                                                                    onlending funds
        30                                                          Generated largest
        20                                                          microfinance loan
        10           8.4
                                                                    portfolio in India
     Portfolio O/s         Mar’04                  Mar’05
     (Million US$)


     ICICI Bank            Other            Total assets through
                           funders          MFI Channel
33
        Innovations in distribution - Internet
        Kiosks
                                                 Connectivity


                        Internet Kiosk
                                                 Multimedia PC
                                                  with Power
                                                    backup
Printer & Other
Accessories :
Enabling desk top
publishing and other
similar work


                                             STD/PCO:
Kiosk Operator:
                                             •Enabling voice
•Entrepreneur
                                             communication
•Provides
commercial services



               …a technology led innovative channel

 34
     The structural components of Kiosks…

        Location                                Infrastructure
           Unmet customer                           PC
          needs                                      Connectivity
           Accessibility
           Expected Revenue



                            Low cost access to multiple
                                     products

        Partnerships
           Government                           Product
           Corporates                               Financial products
           MFIs                                     E Governance
           Telecom / ISP                            Non financial
                                                    products


35
     Offering credit and other financial
     services
        Financial Products          Non Financial Products


     Savings and Remittances            Agri-Extension
     Life & General Insurance           Tele-medicine
      Stocks, Bonds and MFs               Education
               Credit                   E-Governance
      Commodity Derivatives            Communications
         Payment Gateway                Entertainment



      as well as non-financial (partner) services

36
     Agenda

       Financial Market in India



       ICICI Group



       Microfinance in India



       The way ahead




37
        Scaling up access to microfinance
        markets…
VeryFew MFIs
Economically Backward
Low level of micro credit
 penetration




                                      Large no. of MFIs
…Requires reduction                   Economically Vibrant
of geographic                         High micro credit

asymmetries and                        penetration
increasing depth of
outreach…

38
     …through intense initiatives
                        Separate internal team dedicated to task
                         of promoting new MFIs
     MFI Emergence      Formation of 200 MFIs reaching out to
          Team           40 million clients
                        Deliverable is to link MFI to business
                         group for onlending funds


                        Microfinance Training & Research
      Centre for         Institution established by ICICI Bank at
     Microfinance        Chennai
      Research          Comprehensively meet all the training
                         requirements of partner MFIs
                        Research and advocacy role

          …aimed at systematically incubating new MFIs


39
     Our initiatives in establishing a microfinance
     credit bureau…
      Maintains   individual client
      histories
      Credit decision based on
      scoring models – risk based
      lending
      Moving  from group based
      lending to individual based
      lending model
                                       …would enable
      Tracking   clients through      systematic expansion
      life cycle and offering          and deepening of the
      customised solutions to          microfinance markets
      meet life cycle needs


40
        A comprehensive product suite

         Insurance (Ins) – Life and            Investments – Mutual Funds
                 General                       designed for Rural Channels




                                Accident Ins
Tractor Ins


                   Life Ins                         Kiosks



                                                Micro
                     Weather Ins
Home Ins                                       Finance



   41
     The Road Ahead…

                                                 40 million clients
     Leveraging strong delivery
     capabilities to provide all
     financial    services   like
     insurance, savings, micro-
                                                   630,000 villages
     investments, etc to the BoP
     markets

                                          40,000 internet kiosks



                                200 Franchises


             200 MFI partners




42
     THANK YOU




43

				
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