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MICROFINANCE:

THE PARADIGM SHIFT


MICROFINANCE: THE PARADIGM
SHIFT

Submitted to
Mr. JRS Sharma
Professor
IBS – Gurgaon

Submitted By
Prateek Goel

August 30, 2008


ACKNOWLEDGEMENT
We would like to thank Professor JRS Sharma, for giving us this opportunity to prepare this
report and for always being patient with his time and generous with his advice as he supervised
our work.

Our special thanks to Mr. Goyal, librarian, IBS-G for the help that was offered as and when
required by us during the course of preparing the report.

Finally, we would like to express our gratitude to our friends and family, who have always
showed support in every assignment we undergo.

TABLE OF CONTENTS
1. Executive summary
2. Problem statement

3. Introduction
3.1. Background
3.2. Rural scenario
3.3. Reasons for commercial banks to venture into microfinance

4. ICICI Bank
4.1. Introduction
4.2. ICICI and Microfinance
4.3. ICICI’s foray into rural market
4.4. ICICI initiation to Microfinance
4.4.1.The SHG bank linkage model
4.4.2.The MFI intermediation model
4.4.3.ICICI partnership model
4.5. ICICI’s expansion of services

5. HDFC
5.1. Introduction
5.2. Recommendations to HDFC

6. Conclusion
7. References

EXECUTIVE SUMMARY
Microfinance refers to the provision of financial services to poor or low-income clients,
including consumers and the self-employed. As Marguerite Robinson describes in The
Microfinance Revolution, the 1980s demonstrated that “microfinance could provide large-scale
outreach profitably,” and in the 1990s, “microfinance began to develop as an industry”. In the
2000s, the microfinance industry’s objective is to satisfy the unmet demand on a much larger
scale, and to play a role in reducing poverty. While much progress has been made in developing
a viable, commercial microfinance sector in the last few decades, several issues remain that need
to be addressed before the industry will be able to satisfy massive worldwide demand. The
obstacles or challenges to building a sound commercial microfinance industry include:
• Inappropriate donor subsidies
• Poor regulation and supervision of deposit-taking MFIs
• Few MFIs that mobilize savings
• Limited management capacity in MFIs
• Institutional inefficiencies
• Need for more dissemination and adoption of rural, agricultural microfinance methodologies
However some of these challenges have been successfully met by the banks and MFIs in India.
This report aims at evaluating the viability of one of these banks ICICI in the field of
microfinance and to further suggest another grand player of banking sector HDFC as to how it
should venture this field.
ICICI is the biggest centralized private player in the Indian banking sector which has proved its
excellence in the direction of microfinance. ICICI Bank sees an opportunity to make profits in
untouched markets, while improving the lives of poor people. ICICI's microfinance portfolio has
been increasing at an impressive speed. From 10,000 microfinance clients in 2001, ICICI Bank is
now lending to 1.2 million clients through its partner microfinance institutions, and its
outstanding portfolio has increased from Rs. 0.20 billion (US$4.5 million) to Rs. 9.98 billion
(US$227 million).
This success is due to a series of innovative models and initiatives. While a model of
microfinance has emerged in recent years in which a microfinance institution (MFI) borrows
from banks and on-lends to clients, few MFIs have been able to grow beyond a certain point.
Under this model, MFIs are unable to provide risk capital in large quantities, which limits the
advances from banks. In addition, the risk is being entirely borne by the MFI, which limits its
risk-taking.
To address these constraints, ICICI Bank initiated a partnership model in 2002 in which the MFI
acts as a collection agent instead of a financial intermediary. This model is unique in that it
combines debt as mezzanine finance to the MFI.The loans are contracted directly between the
bank and the borrower, so that the risk for the MFI is separated from the risk inherent in the
portfolio. This model is therefore likely to have very high leveraging capacity, as the MFI has an
assured source of funds for expanding and deepening credit. ICICI chose this model because it
expands the retail operations of the bank by leveraging comparative advantages of MFIs, while
avoiding costs associated with entering the market directly.
Few other major strategies used by ICICI in microfinance which gave it an edge over other
commercial banks were SHG- Bank linkage, Intermediatory model, securitization, training new
partners and working with venture capitalists which are covered in detail further in the report.

HDFC Bank in India was set up in August 1994 with the approval of Reserve Bank of India. The
bank was promoted by Housing Development Finance Corporation Limited, a premier housing
finance company of India (set up in 1977).
With the growing competition in the urban sector now its necessity for HDFC to venture in the
rural sector. And the best route to the rural sector of India is microfinance. Rural sector demands
are much more than the current supply of financial aid. Moreover, microfinance has proved it
time and again that it the access and not the interest rates that are a constraint for the poor.
Another discovery followed, that the poor can and will save, and can indeed use a wide range of
financial services such as remittances facilities and insurance products. The most well known
and cited international example of a microcredit institution is the Grameen Bank in Bangladesh.
Further, other factors that justify the venture of HDFC into microfinance are the policy push by
the NABARD and government, the demand pull, the lower operating cost, cross-selling
opportunities, the entry of Processing and FMCG companies into the rural sector through the
similar route.
Since around 78% of the banks in the banking sector today in India are the public sector banks.
Its recommended for HDFC to venture into the microfinance by forming Joint Ventures with the
public sector banks so that they could better avail the subsidies and funds provided by the
government and NABARD.
Following the Microfinance models in their venture could be a fruitful approach. Microfinance
models provide the appropriate and among the best methodologies for these players to deliver
services to the lower income families.

PROBLEM STATEMENT
To evaluate the viability of ICICI Bank’s thrust on Microfinance and to advice HDFC Bank as to
why it should undertake similar Microfinance.

INTRODUCTION
The most important finding in the last two decades in the world of finance did not come from the
world of the rich or the relatively well-off. More important than the hedge fund or the liquid-
yield option note was the finding that the poor can save, can borrow (can indeed decide on loans
to fellow poor), and will certainly repay loans. This is the world of microfinance.

A good definition of microfinance as provided by Robinson1 is, ‘Microfinance refers to small-


scale financial services for both credits and deposits — that are provided to people who farm or
fish or herd; operate small or microenterprises where goods are produced, recycled, repaired, or
traded; provide services; work for wages or commissions; gain income from renting out small
amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and
local groups in developing countries, in both rural and urban areas’.

A bewildering range of players have jumped on to the microfinance bandwagon — for a variety
of reasons. There have been NGOs which gradually metamorphosed into lending institutions,
developmental professionals who have set up microfinance companies and banks that have
experimented with working exclusively with groups and therefore have ‘Microfinance branches’.
These range from not-for profits that see microfinance as having a role in ‘development’, to
commercial banks that view microfinance as ‘good, sound banking’, an excellent way of raising
deposits, and lending at low risk. In fact the success of groups in microfinance has attracted the
attention of wide-ranging players to use these groups for a range of purposes. Several
governmental schemes are being routed through microfinance, including a very large project
funded by the World Bank and being implemented in the state of Andhra Pradesh. Similarly
organizations like Hindustan Lever have looked at the potential of these groups as a channel for
retailing and have launched a program called ‘Project Shakti’ to tap the smaller villages through
the microcredit channel.

Microfinance leaders are gaining prominence and it is said that some of the leaders, particularly
women, have been taking a more active role in other social spheres, including contesting
elections for the panchayat and so on. The Indian microfinance sector is a museum of several
approaches found across the world. Indian microfinance has lapped up the “Grameen” blueprint;
it has replicated some aspects of the Indonesian and the Bolivian model. In addition to the
imported artifacts of microfinance, we also have the home-grown model of self-help groups
(SHGs).

BACKGROUND
For several decades, many economies, including the Indian, experimented with subsidized credit
for the poor. But the only tangible outcome perhaps was the increase in Non-Performing Assets
(NPA). Then came the realization that the core issue for the poor was access to credit rather than
the cost of credit. In fact one of the contributions of microfinance can possibly be the ‘end of
interest rate debate’.

Microfinance has proved time and again that it is access and not interest rates that are a
constraint for the poor. Another discovery followed, that the poor can and will save, and can
indeed use a wide range of financial services such as remittances facilities and insurance
products.
RURAL SCENARIO

FINANCIAL NEEDS OF THE POOR:

In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not used to
carry them out. Almost by definition, poor people have very little money. But circumstances
often arise in their lives in which they need money or the things money can buy.
There are several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood,


old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.

Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.

Investment Opportunities: expanding a business, buying land or equipment, improving


housing, securing a job (which often requires paying a large bribe), etc.
Poor people find creative and often collaborative ways to meet these needs, primarily through
creating and exchanging different forms of non-cash value. Common substitutes for cash vary
from country to country but typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that
“microfinance could provide large-scale outreach profitably,” and in the 1990s, “microfinance
began to develop as an industry” . In the 2000s, the microfinance industry’s objective is to
satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty.

While much progress has been made in developing a viable, commercial microfinance sector in
the last few decades, several issues remain that need to be addressed before the industry will be
able to satisfy massive worldwide demand.

The obstacles or challenges to building a sound commercial microfinance industry include:

• Inappropriate donor subsidies

• Poor regulation and supervision of deposit-taking MFIs

• Few MFIs that mobilize savings

• Limited management capacity in MFIs

• Institutional inefficiencies

• Need for more dissemination and adoption of rural, agricultural microfinance methodologies

REASONS FOR COMMERCIAL BANKS TO VENTURE INTO


MICROFINANCE
Policy Push: The most important factor that got banks involved (in spite of the horrendous IRDP
experience) is what one might call the policy push. Given that most of our banks are in the public
sector, public policy(including frowns and nods from the Finance Minister), does have some
influence on what they will or will not do. In this case, policy was followed by diligent, if
meandering, promotional work by NABARD. (It would be worthwhile to look at how this
particular policy was implemented compared to the other policy and programme interventions by
the state). The policy change about a decade ago by RBI to allow banks to lend to SHGs was
initially followed by a seven-page memo by NABARD to all bank chairmen, and later by
sensitisation and training programmes for bank staff across the country. Several hundred such
programmes were conducted by NGOs alone, each involving 15 to 20 bank staff, all paid for by
NABARD. The policy push was sweetened by the NABARD refinance scheme that offers much
more favorable terms (100% refinance, wider spread) than for other rural lending by banks.
NABARD also did some system setting work and banks lately have been given targets. The
canvassing, training, refinance and close follow up by NABARD has resulted in widespread
bank involvement.

Demand Pull: There is a huge gap between demand and supply .The SHG bug spread among
NGOs rather quickly and they began going to banks to get SHGs linked. But the favourable
policy environment made it possible for NGOs and others to draw the banks out.The most recent
interest among banks, particularly regional rural banks, is perhaps because they are looking for
alternative markets given their present high liquidity. Their SHG portfolio,though small
volumetrically, is performing well (comparable to their prime clients).
Lower operating cost

Finally, for banks the operating cost of microfinance is perhaps much less than for pure MFIs.
The banks already have a vast network of branches. To the extent that an NGO has already
promoted SHGs and the SHG portfolio is performing better than the rest of the rural (if not the
entire) portfolio, microfinance via SHGs in the worst case would represent marginal addition to
cost and would often reduce marginal cost through better capacity utilisation. In the process the
bank also earns brownie points with policy makers and meets its priority sector targets

Cross selling opportunities

Further, bank-groups are motivated by a number of cross-selling opportunities in the market, for
deposits, insurance, remittances and eventually mutual funds. Since the larger banks are offering
all these services now through their group companies, it becomes imperative for them to expand
their distribution channels as far and deep as possible, in the hope of capturing the entire
financial services business of a household. Banks and insurance companies have realized that
NGOs offer a gateway to the
large market of the lower-income households and that accounts for why a number of them, the
ICICI Group leading, are establishing business alliances with NGOs. As long as this enables the
spread of financial services to the underserved at competitive rates, I think it is a good thing that
is happening.

An alternative market

It does not take much analysis to figure out that the market for financial services for the 50-60
million poor households of India, coupled with about the same number who are technically
above the poverty line but are severely under-served by the financial sector, is a very large one.
Moreover, as in any emerging market, though the perceived risks are higher, the spreads are
much greater. The traditional commercial markets of corporates, business, trade, and now even
housing and consumer finance are being sought by all the banks, leading to price competition
and wafer thin spreads.

Usage of SHGs as entry points by Processing and FMCG companies

Both agri-input and processing companies such as EID Parry, fast-moving consumer goods
(FMCG) companies such as Hindustan Levers, and consumer durable companies such as Philips
have realised the potential of this big market and are actively using SHGs as entry points. Some
amount of free-riding is taking place here by companies, for they are using channels which were
built at a significant cost to NGOs, funding agencies and/or the government. In response to this,
BASIX has launched an initiative in retail mutual marketing called ‘Our Way’, where it has
encouraged, trained and financed SHG federations to act as wholesalers for not one but any
number of companies and capture the margins as well as bargain for higher discounts on the
strength of their ‘ownership of demand’. Once again, if this initiative works, it would not be such
a bad thing, for low-income households will get things 5-10% cheaper.
ICICI BANK

INTRODUCTION

ICICI Bank was originally promoted in 1994 by ICICI Limited (a development financial
institution for providing medium-term and long-term project financing to Indian businesses), and
was its wholly-owned subsidiary. After consideration of various corporate structuring
alternatives the managements of ICICI and ICICI Bank formed the view that the merger of ICICI
with ICICI Bank would be the optimal strategic and legal structure for both entities. Consequent
to the merger in January 2002, the ICICI group's financing and banking operations, both
wholesale and retail, have been integrated in a single entity.
ICICI Bank is India's second-largest bank with total assets of about US$ 38.5 bn at March 31,
2005 and profit after tax of US$ 461 million for the year ended March 31, 2005 (US$ 376
million in fiscal 2004). ICICI Bank has a network of about 610 branches and extension counters
and over 2,000 ATMs. ICICI bank is India’s second – largest bank (after the State Bank of India
) with total assets of about Rs 1,327 bn. And a strong network of branches and (no. of
ATMs) ATMs across the country . It offers a wide range of banking products and services to
corporate and retail customers through a variety of delivery channels, Investment banking , life
and non life insurance, specialized subsidiaries and affiliates venture capital and asset
management.

ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs
of clients and to offer products internationally. ICICI Bank currently has subsidiaries in the UK,
Canada and Russia, branches in Singapore and Bahrain and representative offices in the United
States, China, United Arab Emirates, Bangladesh and South Africa. ICICI Bank's equity shares
are listed in India and its American Depositary Receipts (ADRs) are listed on the New York
Stock Exchange (NYSE).

ICICI AND MICROFINANCE


The last few years have witnessed a spate of rural microcredit activities with more and more
institutions moving towards the rural segment in search of new opportunities for revenue and
profit. ICICI bank is one such organization that has been highly noticeable over the past few
years in delivering highly innovative microcredit services to the rural populace. The bank has
come up with viable and promising strategies to see a strong foray into the rural and semi –
urban sector.

The banks activities range from financially supporting a network of village internet kiosks to
partnering with microfinance institutions in providing cheap loans. The Social Initiatives Group
(SIG) of ICICI bank is concerned with development and dissemination of a appropriate financial
services to the economically lagging rural populace .It is working towards providing four classes
of micro financial services : basic banking services, insurance services and financial services
including credit ,equity and leasing and derivatives.

A guideline of the RBI requires all private sector banks to allocate a minimum of 18 % of their
net credit to the agricultural sector .In consonance with this requirement and also due to its own
corporate commitments , the bank is aggressively pursuing its objectives for the rural sector. In
its pursuit to reach a larger rural populace , the bank is currently engaged in forming strategic
alliances with existing Microfinance Institutions .Besides the bank is also encouraging local
entrepreneurs to start up new microfinance institutions as franchisees.The bank is investing in
low cost technology networks that would help it keep the operational costs low . In accordance
with this , the bank is purchasing the high cost loans of existing MFIs and replacing them with
newer loans at lower interest rates. To ensure repayment , the bank has opened an escrow
account allowing the small borrowers the flexibility to repay as per their convenience.

The new policy measures ensures profitability to all the parties involved. The smaller borrowers
are finding it convenient to repay the loans at lower interest rates . The MFIs are economizing on
resources , while the ICICI bank is finding it a profitable business opportunity to make inroads
into the rural segment without making compromises on profitability , as full repayment is
assured .

The bank also offers a variety of other products to the rural masses . Affordable loan schemes to
purchase buffaloes or credit for small tea shops are on its product catalogue .Then there are
schemes for life , non life and even for weather insurance( covering all kinds of climatic
uncertainties ).

ICICI BANK'S FORAY INTO RURAL MARKETS


Banking with the poor is a challenging task as the nature of demand requires doorstep services,
flexibility in timings, timely availability of services, low value and high volume transactions and
require simple processes with minimum documentation. The nature of supply however involves
high cost of service delivery, rigid, inflexible timings and procedures and high transaction costs
for the customers. With these features on the supply side, traditional banking is not poised to
meet the requirements of the demand side. The reach of the banking sector in the rural areas was
as low as 15% in terms of credit potential, and 18% in terms of population with physical access
to a bank branch.
ICICI Bank chose to pursue the unreached rural markets as part of its strategy of being a
universal bank. However, instead of taking the conventional branch banking model for
increasing its outreach, the Bank decided to work with models which would combine the
strengths of intermediary forms of organization with the financial bandwidth of a banking
institution.

ICICI’S INITIATION TO MICROFINANCE

THE SHG BANK LINKAGE MODEL


To enable its foray into the rural markets, ICICI Bank merged with the Bank of Madura
(est.1943), which had a substantial network of 77 branches in the rural areas of a South Indian
state – Tamil Nadu. The Bank of Madura had an expertise in catering to the needs of the small
and medium sector and had a strong network of SHGs. At the time of the merger the Bank of
Madura had 1200 SHGs. However, the program was not yet sustainable. To reach profitability
ICICI Bank devised a three-tiered structure. The highest level was to be a project manager, who
would be an employee of the bank. Six coordinators would report to each project manager and
would in turn oversee the work of 6 promoters. The target for promotion of groups was 20
groups within 12 months, upon which the promoter would receive financial compensation from
the Bank. The coordinator would usually be an SHG member who would coordinate the
activities of the promoters.

Divisional Manager 20 Bank employees


able to manage project
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Project Manager

Outsourced 1 Coordinator manages 6


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staff (leaders
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managing 20 SHGs
Promoters

Group of 20 poor
Community
women
SHGs

The women who had finished a year of promoting the requisite 20 groups were given the
designation of Social Service Consultant. These would travel within a radius of 15 kilometers, in
order to promote as many groups within their area as possible. Strict guidelines were set for
selection of SHG members and SHGs would focus on those who were illiterate and below the
poverty line so that there would be homogeneity in the socio economic background as well. The
SHGs followed the normal pattern of saving until they had internally collected an amount of Rs
6000 in a bank account held in the group's name, through a weekly payment of a small amount
by each member of the group. After this, the amount collected would be lent internally at 24%
p.a. This rate of interest was much less than was available from the informal lenders, and the
entire groups stood to gain as the interest was churned back into the group.

ICICI Bank achieved a high rate of growth, reaching 8000 SHGs in March 2003, with its team of
20 project managers. Within three years of the merger with Bank of Madura, ICICI Bank had
extended its reach to 12000 SHGs. However, the pace of outreach was still slow, and the Bank
began to experiment with other models of reaching the unreached. This was because existing
branches could be leveraged for outreach, but in areas where there were no ICICI Bank branches,
it would not be viable to set up branches solely for the purpose of rural outreach, as such
branches would have a very long gestation period and would costly in terms of overheads.
ATMs were also costly proposition and the infrastructure required was not in place in most of
the remote areas.
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It was felt that in the case of the SHG formation, there was no risk sharing or financial stake/
performance stake of the social intermediary (NGO) in the process of group formation. Once the
groups were formed and linked to Bank credit, there was no more responsibility on the part of
the NGO. The SHGs had been repaying at very good rates, above 95%, yet there was a need to
control the quality of group formation and link it to credit discipline. ICICI Bank also worked
with Self Help Promotion Institutions to outsource the work of group formation institutions
whose core competence was in social intermediation. In this case, the alignment of incentives
remained the same, as the bank staffs were replaced by an external entity, who albeit with the
best of intentions and competencies, would not be able to vouch for the quality of groups created
by it. Thus, despite having good increase in outreach, the model failed to scale up further.

MFI INTERMEDIATION MODEL


ICICI Bank began to experiment with the micro finance institution (MFI) as a substitute for the
more granular Self Help Group. The MFIs were willing to take on the risk of the financial
performance of the groups/ individuals that were being lent to. Therefore the stake in good
quality group formation was also built in. Also, this channel was better for leveraging large
amounts of funds without necessarily having a grassroots level presence of the bank staff. The
MFI would undertake the processes and operationalization in terms of group formation, cash
management, disbursal and recovery, and also record keeping. The Bank would lend to the MFI
on the basis of its balance sheet and portfolio performance and the MFI would repay the bank.

The MFI-Bank linkage model paved the way for taking a wider range of services to the
financially underserved populace. These financial services include provision of microinsurance
tailored to the cash flows and insurance needs of the low-income clients. The microinsurance
ensured the end client a support in case of accidents/ disablement as well as loan insurance in
case of death. This was a significant step towards reducing household vulnerabilities.
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The intermediation model at first looked scalable, but there seemed to be constraints in this
model as well. For instance there was a double charge on capital created, once at the level of the
Bank lending to the MFI and secondly at the level of the MFI on lending to the client. This
seemed to be a sub optimal lending structure due to the double counting that also, because the
small balance sheet size, unduly affected the risk perceived about the MFI, even if it had very
robust systems and processes. Other key challenges to performance were that the MFIs could
not grow and scale as fast as their capabilities would permit, because of severe capital
constraints. Most MFIs had potential access to large debt funds, but because of their small size
balance sheet (which would represent the very limited initial capital of the promoters); they were
constrained to operate with limited debt funding. In the complete absence of equity investors in
the microfinance institutions, there was hardly any scope for the MFI to scale up rapidly.

MFIs on the other hand, were exposed to the entire risk of lending to the end clients, despite their
constrained risk appetite. Most MFIs were operating in a single geography, and the systematic
risk that they were exposed to was large. This put undue risk bearing on these organisations,
especially in the light of their limited geographical risk diversification capabilities. Banks,
which were lending ostensibly to the end- clients, could not get access to any information
regarding the repayment capacity, or repayment behaviour of the end clients, as the MFI not only
acted as an operating and servicing agent, but also assumed the entire risk. If the MFI collapsed
due to any internal organisational issues as opposed to client default, the entire client segment
which had demonstrated credit-worthiness would be deprived of a service provider. On the one
hand were the competencies of the Bank (which had a large amount of finances waiting to be
channelled into the sector) and on the other, the social intermediation expertise of the MFI
(which had a grassroots presence, customer outreach and contact, and could also achieve better
economies of scale if it scaled up and extended outreach faster). There was a need to combine
the strengths of both players, while also building in the correct incentives and using capital
parsimoniously to leverage the maximum value and client outreach from it. Furthermore, there
was a need for close supervision and information tracking so that at no stage would rapid
expansion lead to undetected default due to slackness in monitoring. Costs would have to be
recovered to ensure sustainability. The model would also have to incentivize growth and
preserve the incentives of the originator (of the portfolio) to maintain portfolio performance.

ICICI PARTERNISHP MODEL: JOINING HANDS TO SCALE UP


In 2002, an internal analysis by ICICI Bank revealed that despite consistent evidence of viable
demand from clients, access to MFIs was constrained due to the organization-based financing
model adopted until then. Owing to the limited number of rural branches, the SHG–Bank
Linkage model was not considered a scalable route for ICICI Bank.

Hence ICICI decided to enter into partnerships with the NGOs on a long term basis. These
NGOs set up field organizations for the promotion and management of SHGs as a service
provider. ICICI Bank provides credit, savings and other services such as insurance directly to the
SHGs and NGO further helps in monitoring and collection activities. ICICI also provides
working capital assistance to NGOs to meet cost of promotion during initial years. NGO repays
working capital loan from donor funds (when available) or from service charges.

UNIQUE FEATURES

• ICICI Bank funds the cost of SHG promotion during initial years
• Marries the core competence of NGOs/MFIs with that of banks
• including social mobilization skills with Finance and lending directly to
• the borrowers through innovative channels.
• Model overcomes constraints of NGOs having complete dependence
• on donor funding and MFIs Capital Adequacy Requirements.
• ICICI’s partnership model hence proved to be unique with its features giving a
sustainable solution for the microfinance.

ICICI’S EXPANSION OF SERVICES

EXPANDING THE RANGE OF FINANCIAL SERVICES


ICICI Bank under its strategy to expand in the Micro finance sector is aiming to provide
“complete” market. It is aiming to provide its customer in the rural sector with all sorts of
insurance as and when required by them. All these are provided by the bank along with the
normal loans provided. Under this expansion, the basic insurances that are covered include:

Weather Insurance: Launched India’s first index based rainfall insurance product which
compensates the farmer for loss in yield due to deficient rainfall

Health Insurance: A varied number of health insurances framed especially for farmers have
been launched.

Remittance: Domestic fund transfer facility between urban centre and villages especially to
cater to the migrant population. This plan proved to be a great success and equally useful for the
customers. Family back at home is now easily receiving money sent by the migrated family
members.
Commodity Derivatives: Enable price discovery and hedging against price risks by small
farmers through participation in commodity exchanges with NGO/MFIs serving as aggregators.

ICICI BANK EXPANDS RETAIL MICROFINANCE IN INDIA


Besides retail, ICICI Bank, the second-largest commercial bank, has aggressively doubled its
rural microfinance and agri-business loan portfolio over a period of nine months. The
outstanding in group's total rural microfinance and agri-business portfolio has increased to Rs
10,000 crore compared to Rs 5,200 crore last year.

This comes from an outreach of to 3.2 million low-income clients. Simultaneously, the bank has
also increased its partner strength of microfinance institutions (MFIs) to 102, from 49, over a
period of one year. The bank plans to partner with 200-250 MFIs, each serving three districts in
the country, thus reaching out to 600 in all across the country, through a mix of its products and
channels.

Commenting on the same, ICICI Bank’s executive director Nachiket Mor said: "We are targeting
at partnering with 200-250 MFIs in the next few years." The bank also plans to develop a unique
rural banking proposition by capitalising on the partnership model instead of solely relying on
the branch-led approach.

Under the partnership model with MFIs, the bank forges an alliance with an MFI, wherein the
latter dons the promotional role of identifying, training and promoting microfinance clients, and
the bank finances the clients directly, based on the recommendations of a given MFI.

HDFC BANK
INTRODUCTION
HDFC Bank (NYSE: HDB), one of the first, new generation, tech-savvy commercial banks of
India, was incorporated in August 1994, after the Reserve Bank of India allowed setting up of
Banks in the private sector. The Bank was promoted by the Housing Development Finance
Corporation Limited, a premier housing finance company (set up in 1977) of India. Net Profit for
the year ended March 31, 2006 was Rs. 1,141 crores. Results of the latest quarter ended June
2007, indicate that the bank continues to grow in a steady manner.

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the
private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The
bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered
office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank
in January 1995.

Currently HDFC Bank has 758 branches, 1,716 ATMs, in 325 cities in India, and all branches of
the bank are linked on an online real-time basis. The bank offers many innovative products &
services to individuals, corporate, trusts, governments, partnerships, financial institutions, mutual
funds, insurance companies.

It is a path breaker in the Indian banking sector. In 2007 HDFC Bank acquired Centurion Bank
of Punjab taking its total branches to more than 1,000. Though, the official license was given to
Centurion Bank of Punjab branches, to continue working as HDFC Bank branches, on May 23,
2008.

RECOMMENDATIONS TO HDFC
Microfinance is one of the major alternative market given their present high liquidity. It does not
take much analysis to figure out that the market for financial services for the 50-60 million poor
households of India, coupled with about the same number who are technically above the poverty
line but are severely under-served by the financial sector, is a very large one. Moreover, as in
any emerging market, though the perceived risks are higher, the spreads are much greater.

Joint ventures with rural banks

HDFCs positioning as of today in Indian market is as an urban centralized private bank .Given
that most of our banks are in the public sector, public policy (including frowns and nods from the
Finance Minister), does have some influence on what they will or will not do. For example the
policies were followed by diligent, if meandering, promotional work by NABARD.
Hence if HDFC comes up with joint ventures with the public sector banks working in this
direction they shall have a free ride availing various government subsidies and financial
policies.

Adopting the major microfinance models

The following is a typology of major methodologies shall be employed by HDFC bank for the
delivery of financial services to low income families:

Self-help Group (SHG)

The SHG is the dominant microfinance methodology in India. The operations of 15-25 member
SHGs are based on the principle of revolving the members’ own savings. External financial
assistance – by MFIs or banks – augments the resources available to the group-operated
revolving fund. Savings thus precede borrowing by the members. NABARD has facilitated and
extensively supported a programme which entails commercial banks lending directly to SHGs
rather than via bulk loans to MFIs. NABARD re-finances the loans of the commercial banks to
SHGs.

Individual Banking Programmes (IBPs)

IBPs entail the provision by MFIs of financial services to individual clients – though they may
sometimes be organised into joint liability groups, credit and savings cooperatives or even SHGs.
The model is increasingly popular for microfinance particularly through cooperatives. In the case
of cooperatives, all borrowers are members of the organisation either directly, or indirectly by
being members of primary cooperatives or associations which are members of the apex society.
Creditworthiness and loan security are a function of cooperative membership within which
member savings and peer pressure are assumed to be a key factor.

Grameen Model

This model was initially promoted by the well known Grameen Bank of Bangladesh. These
undertake individual lending but all borrowers are members of 5-member joint liability groups
which, in turn, get together with 7-10 other such groups from the same village or neighbourhood
to form a centre. Within each group and centre peer pressure is the key factor in ensuring
repayment. Each borrower’s creditworthiness is determined by the overall creditworthiness of
the group. Savings are a compulsory component of the loan repayment schedule but do not
determine the magnitude or timing of the loan.

Mixed Model

Some MFIs started with the Grameen model but converted to the SHG model at a later stage.
However they did not completely do away with Grameen type lending and smaller groups. They
are an equal mix of SHG and Grameen model. Others have chosen to adapt either the Grameen
or the SHG model to cater to their markets while some organisations like BASIX use a number
of delivery channels and methodologies (including lending to SHGs) to provide financial
services.

CONCLUSION
Microfinance refers to small-scale financial services for both credits and deposits — that are
provided to people who farm or fish or herd; operate small or microenterprises where goods are
produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain
income from renting out small amounts of land, vehicles, draft animals, or machinery and tools;
and to other individuals and local groups in developing countries, in both rural and urban areas

The obstacles or challenges to building a sound commercial microfinance industry include:


Inappropriate donor subsidies, Poor regulation and supervision of deposit-taking MFIs, Few
MFIs that mobilize savings, Limited management capacity in MFIs, Institutional inefficiencies
and Need for more dissemination and adoption of rural, agricultural microfinance
methodologies.
ICICI’s success in microfinance is due to a series of innovative models and initiatives. While a
model of microfinance has emerged in recent years in which a microfinance institution (MFI)
borrows from banks and on-lends to clients, few MFIs have been able to grow beyond a certain
point.
With the growing competition in the urban sector now its necessity for HDFC to venture in the
rural sector. And the best route to the rural sector of India is microfinance. Rural sector demands
are much more than the current supply of financial aid. Following the Microfinance models in
their venture could be a fruitful approach. Microfinance models provide the appropriate and
among the best methodologies for these players to deliver services to the lower income families.
Microfinance has proved it time and again that it the access and not the interest rates that are a
constraint for the poor. Another discovery followed, that the poor can and will save, and can
indeed use a wide range of financial services such as remittances facilities and insurance
products.

REFERENCE

Business communication by Raymond Lesikar and John Pettit – Irwin AITBS Books

Professional Communication by Aruna Koneru – Tata Mcgraw –Hill publishing Company Ltd

Churchill, C.F. (1996)," An Introduction to Key Issues in Microfinance: Supervision


and Regulation, Financing Sources, Expansion of Microfinance Institutions,"

Microfinance Network, Washington, D.C. February.

www.wikipedia.org

www.moneycontrol.in

www.intomicrofinance.com

www.unpan1.un.org

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