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Table 7:1 Commercial bank exposure to microfinance of selected banks, March 2006 S.No. Bank No of MFIs supported Outstanding as of 31-03-2006 (Rs crore) 1. ICICI Bank 100 2,350* 2. HDFC Bank 250 3. UTI Bank 40 103 4. ABN AMRO Bank 19 87 5. ING Vysya Bank 19 61 6. Standard Chartered Bank 12 50 7. HSBC 8 15 8. Rishikulya Grameen Bank, Ganjam 3 6 9. State Bank of India 1 5 10 UCO Bank 4 2 11. United Bank of India 1 2 12. Indian Bank 2 0.4 Adjusted total (only for reporting banks) 1,991** Source: Responses to a questionnaire or telephonic follow-up, and interviews. *Figure for ICICI includes all microfinance lending. **Includes only partnership lending component for ICICI Bank (assumed to be 60 percent of total microfinance lending). As noted above, about 60 per cent of ICICI Bank's total exposure of Rs 2,350 crore represents lending under the "partnership model" that it pioneered as a way of getting around the discomfort it felt with the lack of equity MFIs had to support high and increasing levels of leverage under the bulk lending model range of 8.5 to 11 per cent. They have come down on the "premium names" in the sector during the last year, but have remained stable for most MFIs despite the hardening of rates generally. Most of the banks have dedicated microfinance units. Lending has been concentrated in the South, but since the AP crisis most banks are expediting their efforts to expand to other "geographies". The "partnership model" As noted above, about 60 per cent 3 of ICICI Bank's total exposure of Rs 2,350 crore represents lending under the "partnership model" that it pioneered as a way of getting around the discomfort it felt with the lack of equity MFIs had to support high and increasing levels of leverage under the bulk lending model, in which the MFI borrows on its own risk and then onlends to the final borrower. Under the partnership model on the other hand the loans remain on the books of the bank, with the MFI providing loan origination, monitoring and collection services, for a fee. As Ananth (2004) and Tara Nair, M S Sriram and Viswanatha Prasad (2005), and others have described extensively elsewhere, the MFI performs the role of social intermediary, which it is best equipped to perform, while credit risk is borne by the bank. While the partnership model greatly eases the equity constraint, it does not remove it entirely, because the MFI partner is expected to share the risk of default in the form of a first-loss deficiency guarantee (FLDG), which is typically around 10 per cent, depending on the bank's risk assessment of the MFI concerned. In other words, the MFI has to provide a "credit 116
Lending to MFIs by the Commercial Banks enhancement" by bearing the risk of default up to the specified FLDG level. 4 It can furnish the FLDG in the form of (i) an FD placed with the bank, or (ii) a bank guarantee(or a combination of both), 5 or (iii) the "excess spread" on the portfolio trapped in a separate account 6 . Where the MFI is unable or unwilling to provide any of these, ICICI makes things easier by furnishing the MFI with an overdraft in the amount of the FLDG, on which the commitment charge is typically 10 per cent (but which attracts penal rates if drawn upon) thereby effectively transferring "mezzanine capital" to the MFI at a rate lower than that at which equity would have to be serviced commercially. The arrangement has worked well, and has supported a massive expansion of lending in the last couple of years. 7 It was put to the test for the first time in the AP crisis, but it is too early to assess how well it will protect the interests of the parties concerned. Portfolio buy-outs and securitization Apart from the partnership model, ICICI has pioneered the use of portfolio buy-outs in India, which is a third means of delivering credit. When followed with securitization of the boughtout assets, it also offers the prospects of reducing rates to the ultimate borrower. Under deals with SHARE and Basix, ICICI has bought-out chunks of their portfolio, for amounts on which it charged 9 per cent, which was 3-4 per cent lower than the previous cost of funds (Tara Nair et al 2005), and which enabled the MFIs to expand lending by the same amount. 8 The FLDGs in these cases varied from 8 to 15 per cent because of differences in the percentage of risky assets in the portfolio, the maturity of the loans and the perceived risks of collection. Once it acquires a sufficient pool of such assets ICICI has the option of securitizing them, i.e. packaging them (pooling them with other assets), getting them rated, and selling them in the capital markets where there is expected to be a demand for such assets from banks that are falling short on their priority sector obligations (the RBI has made such assets eligible for fulfilling PS obligations, as it has the initial buy-out loans). 9 It should be noted that securitization by the lender is possible also under the partnership model, but not in the case of bulk loans, although in the latter case it is quite possible in the future that large credit-worthy MFIs could issue bonds themselves, assisted perhaps by guarantees provided by institutions such as Grameen Capital India (see Chapter 7B). Commercial bank activities in promoting new technology applications Because ICICI's microfinance portfolio is just a small part of its total rural finance portfolio of about Rs 16,000 crore currently, it has taken an active interest in developing what it calls "missing markets", complementary infrastructure, and technology. 10 Over and above the benefits technology offers to the MFI partners of banks, it offers the banks the prospect of easing constraints imposed by the lack of an extensive branch network and the unsuitability of typical branch hours of operation, processes and costs, to serving poor customers, through low-cost ATMs, mobile phone banking, internet kiosks and other devices that help automate cash transactions in the field. The use of portfolio buyouts in India, which is a third means of delivering credit. When followed with securitization of the boughtout assets, it also offers the prospects of reducing rates to the ultimate borrower Over and above the benefits technology offers to the MFI partners of banks, it offers the banks the prospect of easing constraints imposed by the lack of an extensive branch network and the unsuitability of typical branch hours of operation, processes and costs, to serving poor customers, through low-cost ATMs, mobile phone banking, internet kiosks and other devices that help automate cash transactions in the field ICICI's technology initiatives fall under two categories: (i) front-end technology investments such as smart cards with unique identifiers for each client that help track service usage on a real time basis as well as enable the sharing of credit information across the branch network 117
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Microfinance in India A State of th
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List of Tables Page No Table 2.1 Gr
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Preface and Acknowledgements This r
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Abbreviations ABC ADB BC BF CAR CAG
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CHAPTER 1 Overview and Summary of M
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Overview and Summary of Main Recomm
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1 1a 1b 2 2a 2b 2c 3 3a 3b 3c 4 4a
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The Light and Shades Study A major
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highest proportion of weak records
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their profitability after accountin
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allow the programme to grow organic
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1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
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Endnotes 1 It is very hard to compa
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as cash with the groups, the true r
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linkages", 11 percent 3rd, and 5 pe
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References APMAS (AP Mahila Abhivru
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CHAPTER 3 Progress Under the MFI Mo
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Progress Under the MFI Model is fun
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Table 3.4 Comparative performance i
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Progress Under the MFI Model on lit
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Progress Under the MFI Model 4 Howe
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Progress Under the MFI Model Refere
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MFIs, and the need for MFIs to plou
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size had actually come down during
Page 68 and 69: The point at which peer group press
Page 70 and 71: The lack of contact and communicati
Page 72 and 73: Box 4.1 Continued 4. MFIs will coll
Page 74 and 75: Endnotes 1 There will be many disag
Page 76 and 77: 19 The base suicide rate in AP is 1
Page 78 and 79: References APMAS, 2005, "A Report o
Page 80 and 81: (such as cattle and houses), and co
Page 82 and 83: The advantage of the provider model
Page 84 and 85: Some lessons learnt from experience
Page 86 and 87: Box 5.2 VimoSEWA: Synergies between
Page 88 and 89: 86 Table 5.1 Main Feature of Health
Page 90 and 91: Endnotes 1 While the microinsurance
Page 92 and 93: 16 A little less than a fifth of th
Page 94 and 95: 29 The rationale for transfer progr
Page 96 and 97: Roth, James and Vijay Athreye, 2005
Page 98 and 99: Issues and priorities for action re
Page 100 and 101: Endnotes 1 See for instance CGAP (2
Page 102 and 103: 100
Page 104 and 105: such as Chaitanya who soon became s
Page 106 and 107: money to support operational expens
Page 108 and 109: finance, and the microfinancial ski
Page 110 and 111: Box 6.1 Continued in experts and to
Page 112 and 113: Endnotes 1 In a sense it always was
Page 114 and 115: 16 Examples are Margdarshak in Luck
Page 116 and 117: 114
Page 120 and 121: The main constraints to the expansi
Page 122 and 123: further review, RBI has modified th
Page 124 and 125: 9 Thus ICICI has sold some of its b
Page 126 and 127: B. Equity Investments by the Ventur
Page 128 and 129: Figure : The Bellwether triangle Lo
Page 130 and 131: Despite the weaknesses the public s
Page 132 and 133: Box 7.1 Continued foreign sources o
Page 134 and 135: Endnotes 1 At this point they will
Page 136 and 137: References ACCION, 2003, "The Servi
Page 138 and 139: SIDBI Foundation for Micro Credit (
Page 140 and 141: categories, depending on the amount
Page 142 and 143: The distribution of total disbursem
Page 144 and 145: Endnotes 1 It should be noted that
Page 146 and 147: B. Donor Participation in Indian Mi
Page 148 and 149: this has dropped to 8% on the curre
Page 150 and 151: and poor populations. More directly
Page 152 and 153: and expansion of available retailer
Page 154 and 155: 11 SDC through various programs for
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Page 158 and 159: 1.1 Impact evaluation of Spandana's
Page 160 and 161: in the loan tenure of 24 months. Th
Page 162 and 163: There are two main motivations of a
Page 164 and 165: compensation structures used by Ind
Page 166 and 167: Endnotes 1 By Annie Duflo, Anvesha
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29 The main components of direct tr
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