Maximising Access to

Financial Services for the

Poor

Mr. Deepak Varghese,

24 October, 2006
Access to financial services

A fundamental capacity that enables

poor households to..

Manage risk cost-effectively

Respond to growth
opportunities

2
Risks faced by the poor
z Systemic risks
z Vagaries of weather
z Natural calamities
z Crop failures
z Price fluctuations
z Idiosyncratic risk
z Sudden unexpected shocks that temporarily
disrupt the ability to generate income
z Health events
z Life cycle events: marriage, death
z Enterprise risks

3
How do the poor cope with risks?
z The risk coping mechanisms could be ex-ante, ex-
post or as is most common, a combination of the
two
z Ex-ante mechanisms
z Self insurance
z Diversification of sources of income
z Building assets– land, house, gold, livestock
z Mutual insurance
z Informal insurance at the community level

4
How do the poor cope with risks?
z Ex-post mechanisms
z Consumption cutbacks
z Reduction in food consumption
z Postponement of health and education expenditure
z Sale/mortgage of assets, often at distress prices
z Financial intermediation
z Drawing down on savings
z Taking high-cost emergency loans from informal
sources

High-cost risk management strategies adversely

impact consumption and well-being

5
Response to growth opportunities
z Generating additional streams of income
necessitates an initial amount of capital
z This is either not available at all (typically for the
poorest of the poor)
z Not available in adequate amounts
z A high-yielding buffalo typically costs USD 200.
However, the maximum loan available from local
sources is usually USD 160
z The cost at which it is available (local
moneylenders) undercuts viability of the enterprise
z Rates of interest range between 10% on a monthly
basis to 10% on a daily basis

Growth opportunities exist but remain unleveraged

6
Links between access to finance and
growth
z Through household income
increase
z Substitution of high-cost debt
z Investment in purchase of
productive assets
z
Livestock, land, sewing
machine in expansion of scale of businesses
z Investment
z Investment in value-addition to output
z From cultivation of crop to cultivation and initial
processing

7
Links between access to finance and
growth
z Through individual productivity improvement
z Permits investment in education and skill building
that impact future earnings potential
z Improves the risk-taking ability of individuals
z Through local economy effects
z Increase in wage labour opportunities at the local
economy for non-clients
z Enables better utilisation of surplus labour

8
Response of formal financial
institutions in India
z Annual credit demand by poor households
estimated at USD 10-30 bn
z In 2005-06, the total supply of credit did not exceed
USD 1.5 bn
z More than 30,000 rural bank branches servicing
over 600,000 villages (approx. 23,000 individuals per branch)
z Rural penetration of bank accounts less than 20%
z Less than 10% of total insurance premia is
collected from rural areas

9
Constraints faced by formal providers
in responding to this demand
z Risk management challenges
z Information asymmetry
z Inability to offer physical collateral
z Collateral, where available difficult and costly to
enforce
z Potential success of typical enterprises (livestock,
small trade) difficult to evaluate
z Credit history of poor households not tracked
z High degree of exposure of the poor to shocks
z Rainfall, family health events, price fluctuation,pest
attack

10
Constraints faced by formal providers
in responding to this demand
z High cost of intermediation
z Nature of transactions
z Small value, supervision intensive
z A typical loan: USD 100 of 12 months maturity and
weekly collections
z Typical savings: 20 c per week

11
Constraints faced by formal providers
in responding to this demand
z Cash intensive transactions
z Transaction costs range between 8 and 20%
z Principal contributors are use of cash and staff costs
z Low usage of technology
z Cost /transaction at a branch costs USD 1 vis-a-vis
25 c at an ATM
z Staff incentives within organisations delivering
financial services to rural areas often not aligned
to maximising access

12
What seem to be the right responses?
z Pursuing commercial models that have the highest
potential for scale
z Models that combine the financial intermediation
capability and risk capital of mainstream players (banks,
insurance companies) with the origination and
supervision capabilities of grassroots agencies (Micro
Finance Institutions, NGOs)
z Making access to financial services ubiquitous for the
poor through a multi-channel approach
z Making available a range of products
z Savings, remittance, credit, insurance (life, health,
accident, rainfall) and derivatives

13
 The core elements of our strategy
Comprehensive
Comprehensiveproduct
productsuite
suite Ubiquity
Ubiquity

Advanced credit products, ••Through

Throughstrategic
strategicpartnerships
partnerships
••Leverage
Leverage technologyto
technology tokeep
keep
remittances, savings,
costs
costsextremely
extremelylowlowand
andmultiply
multiply
investment, derivatives, points
pointsof
ofpresence
presenceby by
••Operating
Operating throughshared
through shared
health, life, accident,
service networks
service networks
rainfall & livestock insurance ••Reducing
Reducingcashcashhandling
handling
costs
costs

Influence
Influencefinancial
financialinfrastructure
infrastructure

•Action
•Actionresearch
research
•Policy advocacy
•Policy advocacy
14
Executing our strategy
Achieve scale through strategic partnerships

Leverage technology to keep costs extremely low

and multiply points of presence

Comprehensive product suite

Action research

Policy advocacy

15
ICICI Bank’s vision for scale
z Existence of 200 mature MFIs
z Each MFI to have on an average, 1 million customers
– total client base of 200 million
z A hybrid network of 300,000 village points of
transaction (with internet connectivity) to further
outreach of banks/MFIs
z Each MFI/outreach point to provide a comprehensive
range of financial services to the customer including
insurance, savings, credit and derivatives
z Meeting annual credit requirement of poor
households to the extent of USD 10-30 billions
z Insured population of 200 million

16
Allied interventions – livestock
productivity
Majority of micro loans are for
purchase of livestock
Fa
cil
ita
tio Facilitating fodder
ICICI Bank Ltd. n availability

Sourcing high yielding

breed

NDDB Co-ordination for artifical

insemination
on
i
e ns Training for selection of
t
Ex good breeds

Spandana

17
Thank You
 Partnership Model for MFIs

Applicable ROI

Lends 100

Service
MFI
MFI fee
Clients
Bank
Bank Commitment fee Clients
on OD and penal
K allocation rate in the EoD not constrained by
Origination & MFI b/s
Against supervision
Portfolio (100) and
OD limit to MFI Provides OD limit as a
(x% of 100) % of 100 advanced
Efficient use of capital Y
OD limit provides MFI the ability to share Incentive alignment Y
risk & catalyse lending without
corresponding increases in its equity capital
19
 The Partnership Model for MFIs
z The financing structure uniquely combines debt and
mezzanine equity
z MFI estimates the loan requirement of client base and
makes a funds estimate
z Bank assesses historical loss rates to arrive at a pricing
for the loan and an estimate of the quantum of First
Loss Default Guarantee to be provided by the NGO/MFI
z It keeps the pricing of the loan portfolio close to AAA
rates and reflect riskiness in the quantum of the FLDG
z FLDG assumes the character of mezzanine equity
z MFI is provided an OD limit equivalent to the amount of
the FLDG, which is drawn in the event of default upto
the specified limit

Structure separates risk of the MFI from risk of the portfolio

20
Link to capital markets
z Portfolio passes from MFI to bank either through
direct assignment or portfolio securitisation
z Portfolio originated through partnership or
securitised from MFI balance sheets can be pooled
and re-packaged as marketable securities
z These securities can be issued to various classes of
investors
z Residual risks mitigated through credit enhancement
structures
z Returns of investors insulated from solvency of the
originator
z Share Microfin case

21
Implications for the financial system
z MFIs obtain lower cost funds, liquidity and shed assets
from their balance sheet
z Creates a sustainable model to originate ‘priority sector
assets’ which are in short supply
z Catalyses development of a secondary market for micro
finance
z Some entities specialise as originators and others
emerge as buyers
z Creation of new asset classes for investors
z Underlying as micro finance loans and as OD to MFIs
z Offers scope to target participants with specific risk-return
preferences
z Through credit tranching

Broadens financial system participation in micro finance

22
Direct channels: Internet kiosks

Channel built around network of kiosks supported by

Internet providers, agri based companies and state governments

Channel
Channelcharacteristics
characteristics
•Entrepreneur
•Entrepreneurdriven
drivenvillage-level
village-level
points
pointsofoftransactions
transactions
•Ability
•Abilityto
tosupport
supportaasuite
suiteofof
products—financial
products—financialand andnon
nonfinancial Over
•Shared
financial Over6000
6000
•Sharedservices
servicesmodel–
model–reduces
reducesthe
the kiosks
kiosksin
in
cost
costof
ofsingle
singleservice
servicedelivery
deliveryand
and the
the
•Always-on
•Always-oninternet
internetconnectivity--
connectivity-- country
country
facilitates
facilitates real
realtime
timeservices
services(online
(online
payment,
payment,database
databaseupdates
updatesetc.)
etc.)

23
Direct Channels: Credit Franchisee
z Channel based on a network of technology ‘front-
end’ (branch) owned and managed by franchisees
z Bank provides the hardware and back-end
transaction processing capability
z Emphasis on collateral based lending for larger
ticket sizes
z Total number of credit franchisees around 900

24
Leveraging Technology
z FINO: In partnership with IT & telecom
companies it provides low cost technology and
communication solutions to MFIs
z Application Sevice Provider that provides
z Front bend support (smart cards, POS terminals)
z Back end support (Banking softewsre, MIS)
z Information services (Credit Bureaus)

25
 Concept of FINO

Systems for Local Financial Institutions (MFIs,

Inclusion NBFCs, RRBs, Co-operative Banks, etc.) and
grass-root institutions serving the unbanked

Shared platform for end-to-end delivery of

entire suite of financial services leading to Common
economies of scale

A sectoral venture based on non-brand

Open leaning, non-restrictive and open-to-all
technology philosophy

26
Comprehensive product suite
z Delivery of a suite of products through channel
partners
z Investment, remittances, credit, life and general
insurance, derivatives, loans (unsecured, crop
loan, post-harvest, jewel)
z Expanding the product suite given the needs and
ability to pay of the poor
z Health insurance
z Weather insurance
z Price derivatives and options
z Livestock insurance

27
Action research
z Led by the Social Initiatives Group (SIG)
z A not-for-profit group within the bank with a mission to
improve the capacities of the poorest of the poor to
participate in the larger economy
z Works in the areas of early child health, elementary
education and micro financial services
z The micro finance practice of the SIG
z Aims to maximise access to financial services for the
poorest of the poor
z Supports pilots and research to test new hypotheses
and expand the frontiers of our micro finance work
z Disseminates learnings extensively
(www.icicisocialinitiatives.org)

28
z Interventions in training, and research
z MicroSave provides training support to fledging MFIs

z Research and Consultancy support

z Centre for Micro Finance (CMF), in collaboration with
Universities like MIT and Stanford is conducting sector
research
z Centre for Insurance and Risk Management (CIRM) is
developing risk mitigants products for the poor
z Centre for Development Finance (CDF) is improving the
efficiency and targeting of public and private financing for
infrastructure and identifying priority areas for public and
private financing.
z Small Enterprise Finance Centre (SEFC) is advancing the
research and practice of SME financing and growth

29
Policy advocacy
z Engagement with the regulator to provide the right
incentives for expanding access to financial services
for the poor
z Emphasis on well-designed market linked products and
removal of explicit subsidies
z Use of third-party networks for the delivery (including
cash handling) of all financial services, especially
savings
z Learning from international experiences on
innovations in delivery and design
z Brazilian model of Banking Correspondents
z Building consensus among practitioners on key
issues
z Governance, transparency and information sharing
z Credit bureau

30
Weather insurance
z Launch of an index-based rainfall insurance
z Collaboration with World Bank and ICICI Lombard
z Pilot in Mahabubnagar, Andhra Pradesh with 200
groundnut and castor farmers
z Index insurance superior to traditional crop insurance
z Payout based on transparent index not on yield
assessment and can be almost immediate
z Moral hazard issues effectively eliminated by
design
z Product is being scaled by ICICI Lombard nationally
z Currently covers 3000 farmers in the states of Andhra
Pradesh, Uttar Pradesh, Rajasthan and Tamil Nadu

31
Critical Health Insurance
z Benefit payout model of health insurance
z Designed in collaboration with ICICI Lombard in
2004
z Pilot in collaboration with Spandana
z Covering 500,000 individuals
z ICICI Bank provides a loan for the premium
z Product characteristics
z Benefit Payout for pre-identified critical diseases
z Immediate payout on producing diagnostic report

32
Health Insurance
z Managed indemnity model
z Cashless model including a provider, insurer and
insured and managed by a Third Party
Administrator
z Being developed in collaboration with ICICI
Lombard
z Provider network-Narayana Hrudayalaya,
Karnataka
z Covering 600,000 individuals
z Includes consultation, surgeries and partial drug
costs
z Similar models being pursued with
z Escorts Group of Hospitals, Punjab and Haryana
z Manipal Group, Karnataka
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NCDEX
z ICICI Bank is one of the key promoters of
National Commodity Exchange (NCDEX)
z NCDEX is a nation-level, technology driven de-
mutualised on-line commodity exchange
z Facilitates trading of fifteen commodities - Gold,
Silver, Soy Bean, Refined Soy Bean Oil,
Rapeseed-Mustard Seed, Expeller Rapeseed-
Mustard Seed Oil, RBD Palmolein, Crude Palm
Oil, Cotton - medium and long staple varieties,
Pepper, Rubber, Jute Sacking, Chana and Guar
Seeds

34
Coffee derivatives product
Provide credit to farmers
against stocks
Farmer ICICI Bank

Back-to back hedge for the

Zero cost floor - cap on option structure
coffee prices
Commodity
exchange
Advantages of the structure:
z Improves credit rating of farmers since value of inventory is
protected in case of adverse volatility
z Farmer receives option products which are normally not
available directly
ICICI Bank assumes the commodity risk from the farmers
(which is subsequently hedged at an exchange)

35
Livestock insurance
z Challenges in delivering livestock insurance
z Pricing
z Assessment of the value of the animal
z Coverage– for death or for permanent total disability
(PTD)
z Fraud Control
z Identification of the insured animal at the time of claim
settlement
z Traditional ear tags are easily lost or and are replicable
z Use of veterinary doctors to confirm cause of death adds
to cost
z Options explored to address fraud control issues
z Use of cold tagging
z Use of unique identifying electronic chip

36
 Kisan Loan Card

Limit set on card on the Tobacco sale proceeds

Tobacco farmer basis of inputs availed by offset against the loan
issued a card farmer & production availed
needs

Farmer has access to Excess funds instantly

funds through cash swept to deposit
dispenser account of farmer

37
Expected Benefits to Stakeholders

Benefits to Tobacco Growers

•Instant cash availability
•Anytime access to money
•Easy registration and renewal
•Card acceptance in the future can be scaled up to
other merchants

Benefits to Tobacco Board

•Increased operational efficiency in loan
disbursement and recovery
•Reduced paper work
•Potential savings at the time of fund remittance to
farmers

38
Share Microfin securitisation case
z Share Microfin Ltd. is the largest MFI in India
replicating the Grameen methodology
z ICICI Bank securitised the receivables of micro-
finance loans from Share amounting to USD 4.57
million
z Loans made by Share to micro-finance clients for
agricultural purposes
z Consideration calculated by computing the NPV of
receivables amounting to USD 4.57 million at an
agreed discount rate.
z Partial credit protection provided by Share to ICICI
Bank
z A guarantee amounting to 8% of the receivables under
the portfolio by way of a lien on fixed deposit

39
The model is reducing geographical
asymmetry… zzVery
VeryFew
FewMFIs
MFIs
zzEconomically
EconomicallyBackward
Backward
zzLow
Lowlevel
levelof
ofmicro
microcredit
credit
penetration
penetration
Orissa

Jharkhand

Rajasthan

zzLarge
Largeno.
no.of
ofMFIs
MFIs
Uttar
zzEconomically
EconomicallyVibrant
Vibrant
Pradesh
zzHigh
Highmicro
microcredit
credit
penetration
penetration
Maharashtr
a
40