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The case describes microfinance initiatives of ICICI Bank, the largest private sector bank in India. In spite of being
a new entrant, ICICI Bank has been highly successful in the microfinance sector, primarily because of its
innovative microfinance business models. The case discusses some of these models including Bank led &
Partnership model. Other microfinance ventures of ICICI Bank are also explained in detail.

The case presents how ICICI Bank has made microfinance a viable business proposition for banks.

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» Business models of Microfinance, how to make microfinance a viable business option

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^akshmi, a 22-year-old school dropout, lived in a remote village of Tamil Nadu. Instead of getting married and
starting a family like any other village girl of her age in India, she wanted to set up on her own business.

^akshmi started an Internet kiosk in her village, offering services like e-mail, Internet chat and tips on health and
education. The kiosk was partially financed by ICICI Bank and was set up in association with n-^ogue
Communications.3 ^atha, a 29-year-old married woman with three children borrowed Rs.18,000 to set up a
small provision store in Kothaipalli, a small village, in the north of Andhra Pradesh. Within a year, she
started earning Rs.3,500 a month from the store. With this money, she was able to provide her children a
good education at a local private school. She was a part of a self help group in Andhra Pradesh which
received financial assistance from ICICI Bank. These are real-life examples to illustrate how the micro-
lending initiatives of ICICI Bank affected the lives of poor women in India.

By becoming a part of self-help groups, several rural women were able to move out of poverty. Apart
from financial benefits, the initiatives helped the women to develop self confidence, improve their
communication skills and raise their position in society.

In India, 400 million people spread across more than six million villages are estimated to be in need of
micro-financing. The organized financial sector caters to the need of about 20 million people. ICICI
Bank's micro credit initiatives involved lending small amounts to the people below poverty line. It
provided basic banking services like savings and withdrawal along with micro-investment products like
mutual funds.

This provided poor people with safer avenues for saving with little volatility. ICICI Bank was also
instrumental in designing new structures through which microfinance institutions (MFIs) and non-
governmental organizations (NGOs) could overcome capital constraints and expand their reach...

The structures included buying the microfinance portfolios of MFIs either on a selective basis or buying the
complete loans of a branch or a particular area, and also entering into partnership arrangements with MFIs. This
helped in leveraging the operational strength of NGO/MFI with the financial strength of ICICI Bank. In the
world's largest securitization4 deal, ICICI Bank purchased a portfolio of 42500 loans worth US$ 4.3 million from
Share Microfin ^imited in 20045...

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In March 2004, the cumulative disbursements to SHGs stood at Rs.39 billion.6 According to industry experts, the
demand for microfinance in India was estimated at about Rs.300 billion . This meant there was a huge unmet
gap between demand and supply.

In the past, high demand and low supply of micro-credit was blamed on the limited efforts of major Indian
financial institutions to reach the poor. Banks considered small loans as a statutory obligation rather than a
business opportunity. Mainstream financial institutions considered these loans as ones that were difficult to
recover, unprofitable and involving high transaction costs.

These loans were perceived to carry high risk as they had high default rates; the borrowers usually did not have
any viable income generating opportunities nor did they possess any collateral guarantee.

To fill the huge gap between demand and supply, an environment that was conducive for microfinance
providers was required. ICICI Bank was promoted in the year 1994 as the banking division of Industrial Credit
and Investment Corporation of India ^imited (ICICI). ICICI was a developmental financial institution
incorporated in the year 1955, as a joint initiative of Government of India, the World Bank and
representatives of the Indian industry.

By the 1990s, ICICI had emerged as a diversified financial group that offered a wide range of financial
products through a network of subsidiaries and affiliates. In April 2002, ICICI merged with ICICI Bank...

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The bank led model was derived from the SHG-Bank linkage program of NABARD. Through this program, banks
financed Self Help Groups (SHGs) which had been promoted by NGOs and government agencies.

ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG program. However, rather than
spending time in developing rural infrastructure of its own, in 2000, ICICI Bank announced merger of Bank of
Madura (BoM), which had significant presence in the rural areas of South India, especially Tamil Nadu, with a
customer base of 1.2 million and 77 branches.

Bank of Madura's SHG development program was initiated in 1995. Through this program, it had formed,
trained and initiated small groups of women to undertake financial activities like banking, saving and lending.
By 2000, it had created around 1200 SHGs across Tamil Nadu and provided credit to them...
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The SHG program had been fairly successful in several states of India, but the reach was limited only to those
areas where the bank's branches were operational. The partnership model of ICICI Bank aimed at reaching those
areas where the bank did not have any branches.

This model aimed at synergizing the comparative advantages and financial strength of the bank with social
intermediation, mobilization power and infrastructure of MFIs and NGOs. Through this model, ICICI Bank could
save on the initial costs of developing rural infrastructure and micro credit distribution channels and could take
advantage of the expertise of these institutions in rural areas. Initially, ICICI Bank started off by lending to MFIs
and NGOs in order to provide the necessary financial support to their activities. ^ater, ICICI Bank came up with
a plan where the NGO/MFI continued to promote their microfinance schemes, while the bank met the financial
requirements of the borrowers...

  
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As a part of microfinance initiatives in the agriculture sector, ICICI Bank developed Farmer Service Centers (FSC).
An FSC was managed by an agricultural input supply company which supplied inputs like seeds and technical
knowhow to the farmers.

FSCs were also managed by an extension service organization which provided inputs, credit and technology or
by an NGO that provided all the services that farmers needed for their agricultural needs. Working in close
association with farmers, FSCs provided them with services like advice on seeds, sowing techniques, pest
control, weed control, usage and dosage of herbicides, pesticides and fertilizers and other services associated
with agriculture. The FSCs also provided crop-related information and services to farmers, apart from
facilitating the sale of agricultural produce. The FSCs arranged to procure the produce through agents and sold
it in organized agricultural markets thus getting better realization...

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ICICI Bank plans to use the services of over 100,000 agents for its various microfinance initiatives. The bank has
encouraged direct sales agents to market microfinance products into rural areas.

These agents contact several borrowers, thus expanding the reach of ICICI Bank at a low cost. Taking the FSC
initiative further, ICICI Bank plans to provide farmers credit from sugar companies, seed companies, dairy
companies, NGOs, micro-credit institutions and food processing industries.

SIG has been involved in a project in the southern state of Tamil Nadu to find out how wireless technology can
be applied in the development of low cost models of banking. Another plan to increase the reach in rural areas is
to launch mobile ATM services. ICICI Bank branded trucks have started carrying ATMs through a number of
villages...