Return to E-news Main Page
Return to Microcredit Summit Home
|
|
|
||
| Volume 2, Issue 1: June '04 | ||||
|
||||
|
Return to E-news Main Page Return to Microcredit Summit Home |
||||
|
In This Issue Responses to New York Times Editorial Regarding New US Law on Poverty Measurement Tools REGISTER NOW for Middle East/Africa Region Microcredit Summit Meeting of Councils Microcredit Summit Campaign Announces Appointment of New Africa Regional Organizer Archived Issues
Vol 1 Iss 6 Jan. '04 |
Asia Pacific Region Microcredit Summit (APRMS) Council Meeting Of Corporations, Banks, Foundations And PhilanthropistsIntroduction by Greg Casagrande, Presentations by Ola Ree and Bindu Ananth, and following questions and answers
|
| "This year we have lent about US$40-$50 million of assets in microfinance. Collectively this represents outreach to over 2 million poor households and some of the key partners include Basix, SHARE, CASHPOR…we are currently in a process of exploring partnerships with emerging and smaller financial institutions." |
Coming to microfinance…interestingly enough was one of the focus areas within the Social Initiatives Group along with health and education. And somewhere along the way, about 6-8 months down the line, we realized that there is an underlying commercial model here, and then we pursued the commercial department of the bank. Currently we have both a commercial interest as well as a research interest in microfinance and both…coexist within the bank.
In microfinance, over the past two years, we have gradually been building up our asset size. This year we have lent about US$40-$50 million of assets in microfinance. Collectively this represents outreach to over 2 million poor households and some of the key partners include Basix, SHARE, CASHPOR…we are currently in a process of exploring partnerships with emerging and smaller financial institutions. The other factor which I would like to highlight, is that recently we concluded two securitization transactions with MFI's that is Basix and SHARE in India.
…The core elements of our strategy has…been entirely through partnerships. There is no microfinance activity that ICICI Bank is doing directly through its branches or through its own personnel…So two core themes really [come] to my mind which are the key elements of a strategy—one is liquidity, creating liquidity for the bank—through partnerships which are low cost in nature and with organizations that have a strong field presence and are already existing, and the NGO-MFI partnership to come within that strategy. The second prong of the strategy really has been to go beyond credit and really expand the range of financial services available to the poor….[to include] credit, savings, remittances, investment products, derivatives…Both from the perspective of creating cost effective channels, as well as addressing comprehensively the vulnerability of the underlying populations.
…In terms of achieving liquidity and low cost outreach, one of our efforts is to identify and promote shared services for inter-transactions at the village level. If you look at the Indian banking system, we have about 33,000 rural banks in all. And the number of villages is about 500,000. So clearly the bank branch network…is not enough given the size of rural India…We are thinking of shared services network, for example internet viewers or agricultural and food service providers who can combine financial services with other products, distribution of financial services with other products.
The other effort is to constantly drive down the cost of intermediation so that we are able to deliver financial services at a rate that makes sense for the underlying client. So towards this end we are looking at replacing the use of cash, which is one of the key drivers of costs, with cards, both magnetic as well as smart cards. We are engaged in the development of a low-cost ATM which will do away with the need for a bank branch in every village. And currently we are engaged in a pilot program of financial services through internet kiosks in South India. There are about 600 such internet kiosks in the network and we are currently offering Internet banking, investment, remittances, and other products through these points. …the mission must be to enable the rural or urban poor to face a complete market, not a fractured market, in terms of access to only credit. Because clearly if you look at the underlying expenditure, a lot of borrowing that happens through microfinance in India…is used to finance health expenditure, which…is not exactly efficient, and has the potential to be replaced with other products like insurance…
…there is clearly no capability to expand by relying only on our network because we are not branch heavy. The idea is to use partnerships and technology to multiply outreach. What we were doing…two years back, was providing…mid and long term loans to microfinance institutions…And the first thing the relationship manger will do is look at the balance sheet of the MFI or NGO and then that is the end of the story because most MFI's had no capital, had negative net worth…So we realized that we cannot not do business…just because this was a problem. We realized that there was a need to go beyond plain dominating structures and think of innovative financing structures through which we could still bring this market without exposing ourselves to too much risk.
In summary, these are the three structures that we are using to work with NGOs and MFI's in India today. These are three, basically the core principles are the same, but they are variant. One is a partnership model in which we are saying that the partner, who can be either an NGO or a microfinance institution, engages in promotional work, originates the loan—life as usual—but the loan is booked directly in the books of ICICI Bank…The NGO or MFI plays purely the origination, supervision and monitoring role for the underlying portfolio. Now there is one danger in this that the clients starts thinking that it is not the MFI loan and I can just run…with it—an MFI itself does not feel incentivized to keep up the levels of supervision that it was doing earlier. Therefore the design that has been incorporated to take care of that has been that the partner shares part of the credit risk. Earlier the MFI used to take 100% of the credit risk, now they only take 10% of the first loss on that portfolio, which is what we call a first loss default guarantee. And the rest of the 90% of the risk is met by the bank. The bank compensates the NGO or MFI partner for all of the administrative and supervision work that it is doing. So this is a model that seems to be gaining maximum appeal among our partners in India.
| "The other, non-taxed securitization are fairly common instruments in other retail markets like auto loans and home loans but this is the first time that anybody in the world has done it for microfinance and…what happens is that say, SHARE, had originated a portfolio…But because of the capital constraint it can not wait for eight months for the loan to mature to start originating a new portfolio. So what SHARE did effectively was to assign receivables to ICICI Bank of the loan that was originated and ICICI…refinances the portfolio and the cash is immediately available to the partner…" |
The other, non-taxed securitization are fairly common instruments in other retail markets like auto loans and home loans but this is the first time that anybody in the world has done it for microfinance and…what happens is that say, SHARE, had originated a portfolio…But because of the capital constraint it can not wait for eight months for the loan to mature to start originating a new portfolio. So what SHARE did effectively was to assign receivables to ICICI Bank of the loan that was originated and ICICI…refinances the portfolio and the cash is immediately available to the partner… [and] the capital constraint is removed. Because all of the credit risks, all of the capitalization is happening with the bank, the MFI really focuses on what it does best, which is in the field, interfacing with the clients and continuous monitoring.
…More on the partnership model…ICICI Bank partners with an…NGO or MFI on a long term basis…they set up a field organization for monitoring, etc and there is an initial operational deficit for the first two years because…group promotion is an expensive proposition. But income from these groups comes only in a two- to three-year time frame. So there is an operational deficit. So we are looking at working capital assistance for NGO MFI's for those initial years. The NGO or MFI really takes that loan from donor funds or from service charges as is convenient to them. How is it different to what is happening right now? …it seems to be an optimum combination of core competency of MFI's and banks…
…the last point is about convergence with the themes of the summit…the impact that we will have at the end of the day is the needed impact that our partner organizations are able to deliver on the ground. It's not something that we can do independently of our partner NGOs and MFI's. And the one thing that we recognize is that in the daily commercial grind of making loans, making sure it is coming back, a sense of impact gets lost. So there is a special union created which is really where I am coming from, the Social Initiatives Group, which is to engage in product development and making sure we are delivering very high quality products to our MFI clients as well as measuring the impact of our microfinance institution partners. Because a relationship manager is less likely to ask questions like "what has been the impact on the underlying clientele" "How much have they moved out of poverty?" So we realized there is a need for all sorts of action…to complement the commercial banking activity…
Question: …What I worry about is… its always the SHARES and the BASIX and the CASHPORS who are being chased by the USAID, by CGAP, by World Bank, by DFID, and now ICICI. So when we talk of microfinances serving the poor, who are we really serving? …Why should you again and again go into Andra, which is supersaturated anyway? Why should you be driven by a couple of MFI's who come to you and who have lovely balance sheets, who already have leveraged funds from Grameen and from all of the donors? The second question is, you said 8-9% but do you really think about what it is ultimately costing the customer because what I heard in the CASHPOR presentation it was they charge 6% as their fee…So what I saw is basically…these NGOs are behaving as brokers to get you into markets you find are high risk right now…But what's in it for the poor? …With you, is it better?
| "And the interesting thing that is happening is that if you take an organization like say, BASIX or SHARE, with growth and with the promise of continuous funding support, they are now getting to these areas. SHARE with the transaction just completed, can now open new branches in Orissa." |
Bindu Ananth: …they [SHARE, BASIX and CASHPOR] are not the best MFI's in the country for no reason. Its because they have good systems, they have good leadership. Our effort really is to stretch back to the maximum extent, being cognizant of the fact that it is not enough. So simultaneously we are trying to pursue organizations to work in underserved regions like Orissa, Bihar, etc. And the interesting thing that is happening is that if you take an organization like say, BASIX or SHARE, with growth and with the promise of continuous funding support, they are now getting to these areas. SHARE with the transaction just completed, can now open new branches in Orissa. So in my mind at least, if the idea is access to finance, how we grow access to finance for the poorest is a question of strategy…
I'll just take her second question also on pricing. Its true that currently we are not regulating what the partner MFI's are ultimately charging and currently you might criticize that but it is being done in good faith that the partner MFI has enough governing standards that it is not retaining large chunks of surplus but is actually reflecting what the transaction costs are. And why would the poor come back at 23-24%? It's true that CASHPOR is working with the poorest and I think we've all seen that. It really is at the end hard economics, about what is my alternative source of finance? …Now if CASHPOR stops then you have 33%—are people going to stop saving, stop borrowing? No. They are doing it at a much higher cost…They are not going to borrow at 33% if another MFI or another local moneylender is willing to lend at 16%…We hope that market dynamics and competition will drive it down, as is happening in Andra today.
Question: …You said that at times the MFI's have deposited with you donor grants in the way of collateral. Is this deposited as a fixed deposit and if so, what is the rate in comparison to the rate at which you loan them at. And then, when they make this deposit, how much more do you lend to the MFI? And then also, I am interested to know what is the interest rate that effects the situations in India? What interest rate are they lending out to MFI's? I would also want to know if you had cases of default, were there MFI's you have lent out to, and how have you handled it? ….In the choice of your MFI's that you work with, do you work with already sustainable MFI's or those which are about to be sustainable? What criteria do you use? The last one now—when you take grant deposits from MFI's you are going to lend to, do you also sign an agreement with a donor who supplies these donor funds or is this just an agreement between you and the MFI?
Bindu Ananth: Yes, the guarantee amount, if it is coming by way of deposit, this is a fixed deposit and it will earn within the region of 5.5%-6.5%. And the lending rate, as I told you earlier, is between 8.5-9%. Default experience—we have zero people default under microfinance. It is only two years so it is not too much to talk about, maybe it will change in the future. But our outlook is that if the underlying loan turns bad then I am not going to go to the village and chase it because it is going to cost us much more to recover it. So our approach is to spend a lot of time structuring it, selecting the MFI partner with the view to minimizing default…Choice of MFI's?—I think a couple of things are important to us. One is really the capacity to manage and…the quality of the information systems—what is their capability to report data, because they need to report on individual loans at very high frequency…Good quality field staff…[and] a very good poverty targeting technique…Because the person who truly needs the finance and who will keep the relationship with the lender will come back because the alternative source of finance is not there.
Question: There is an observation that the financial sector…[and commercial banks] are shifting to microfinance. So is this due to a feeling of social responsibility? Or is it a business strategy that you want to save investment as a banker? And for the MFIs, both you and the MFIs, I'd like to know whether this partnership is rewarding? … I also want to know whether you are operating this…NGO bank partnership…outside [of] India and, if so, whether you would like to come to Bangladesh?
| "If you look at banks in India, honestly I would say that the primary reason why most of them are thinking about it is because of private sector obligation, regulatory obligation that you need to get 40% of your net bank credit in rural enterprise areas…" |
Bindu Ananth: That is truly the best compliment, whether ICICI Bank would like to operate in Bangladesh. But we are only in India and even in our corporate business we have just started going to other countries. We have started branches in the US and London in the last six months. But it's an interesting proposition but not in the near future, there is a lot to be done in India… If you look at banks in India, honestly I would say that the primary reason why most of them are thinking about it is because of private sector obligation, regulatory obligation that you need to get 40% of your net bank credit in rural enterprise areas…
Greg Casagrande: My little observation is that with the microfinance institutions now reaching 50 million poor people around the world and projected to be 100 million within the next twenty-four months, and based on listening to these two observations now, a bank and a telephone company are successfully linking with customers who are very poor, that there has got to be more… 50 million people, that's an awful lot of people [for] profit oriented banks and profit oriented companies that want to tap into that network. So I think what we need to do is learn from these two companies here and think of other ways that we can enlighten some of our corporate brethren and our commercial banking brethren to find ways that they can link with the MFI's to the benefit of the company, the benefit of the MFI, and the benefit of the members.
