NEWS WIRE: India: Banks Building Innovative Distribution Channels Through Microfinance Institutions to Reach the Bottom of the Pyramid

Suvarna, a frail, 49-year-old, grocery vendor in the village of Junnar in Maharashtra’s Pune district is spoilt for choice in borrowing money, and the local moneylender is at the bottom of the pile in options. She is being offered Rs 15,000 at a seemingly still steep, but less usurious, interest rate of 24% by the likes of SKS Microfinance and Share Microfin.

Now Indian banks also want a share of the fortune that exists at the bottom of the pyramid. But they are grappling with a question: How to reach consumers at the bottom of the pyramid?

So far, seven banks (See Reaching Out) have managed to tap over 50 lakh customers across the country in this segment, disbursing about Rs 3,000 crore. But that’s only a tiny percentage of the addressable market size of 6-7 crore potential customers capable of absorbing about Rs 40,000 crore, shows estimates by Gurgaon-based Micro-Credit Ratings International (M-CRIL). It believes the 60 million low-income households in India can consume credit worth Rs 8,000 crore every year.

“The financially excluded are a big opportunity,” says Nachiket Mor, Deputy Managing Director of ICICI Bank. Agrees Neeraj Swaroop, Chief Executive Officer (CEO) India of Standard Chartered Bank: “The demand for micro-finance is enormous in India, provided the intermediaries have the ability to absorb the credit in a cost-effective manner.” Banks are putting in place strategies—both plain vanilla and innovative—in order to achieve some aggressive targets. (See Big Schemes On The Small)

The Plain Vanilla Route

Wholesale lending through micro-finance institutions (MFIs) is the largest pipe for directing banking funds into the micro-finance segment. While the channel offers a good distribution network, it takes on the risk of defaults, even while assuring banks a 2-3% spread.

Not surprisingly, while HDFC Bank had 10 MFI partners in 2003, it now works with 75 and an equal number of non-government organisations (NGOs). ICICI Bank works with 210 MFIs, while Standard Chartered has tie-ups with 15 and ABN Amro, 29.

More such partnerships are likely to emerge. “We will have to go even further down (the pyramid)—not all on our own but through alliance partners, local area banks and large corporates entering big retailing and contract farming,” says Sanjay Nayar, CEO of Citibank India.

Banks are also testing out several innovations in their relationship with MFIs. For instance, ICICI Bank has decided not to set up any more micro-finance branches but to rely entirely on partnerships. With that was born the concept of ‘microfinance factory.’

Set up in collaboration with the Centre for Micro Finance at Chennai’s Institute of Fundamental Management and Research (IFMR), this ‘factory’ is mandated to incubate and support newer MFI models and provide support to entrepreneurs. “The micro-finance factory aims to provide all the building blocks critical to MFIs, such as seed capital, operation models, product development, technology support and human resource training,” explains Brahmanand Hegde, Joint General Manager and Head of Microloan at ICICI Bank.

A franchisee model is also in the works. Dubbed IntelleCash, this model is being developed by ICICI Bank in collaboration with Intellecap, an MFI development company, and Cashpor, an MFI. IntelleCash will provide support systems and mentoring for start-ups for a fee. It seeks to reach out to one crore clients and add over Rs 4,000 crore ($1 billion) in outstanding loans through 60 IntelleCash franchisees across India by 2010.

Other banks are also into the innovation game. ABN Amro Bank is using the ABN Amro India Foundation (AAIF) to create capacities among start-up MFIs in the underserved regions. It is working with six such MFIs—three in Assam, two in Bihar and one in Uttar Pradesh. “We target to scale up to over 50 in the next three years,” says Moumita Sensarma, Head of Microfinance and Sustainable Development at ABN Amro Bank.

Citibank’s approach, though, is slightly different. It recently signed up a financing deal for about Rs 160 crore ($40 million) with SKS Microfinance. Under the terms of the agreement, loans originating in the latter’s books would automatically be transferred to Citibank after the assets are seasoned for a month. Here, the risk is also passed on to Citibank. It has also entered into agreement with another MFI, Basix, for Rs 29 crore ($7 million). This would cover about 50,000 urban micro-finance borrowers spread out in Hyderabad in Andhra Pradesh and Indore in Madhya Pradesh.

“We will go even further down (the pyramid), not all on our own but through alliance partners, local area banks and corporates” Sanjay Nayar CEO, Citibank India

“We are continually looking at different ways of reaching out to the unbanked and underserved segments,” says Alok Prasad, Head of Strategy and Business Development and Business Manager for the Microfinance Group at Citibank India. “We are doing this in various ways, including partnering with larger and relatively mature MFIs on a multi-product basis,” he adds.

Direct Intervention

However, Yes Bank’s strategy is in sharp contrast to ICICI Bank’s policy of not setting up its own branches or distribution network. During its first year of operations, Yes Bank disbursed Rs 75 crore in wholesale funding to MFIs. It is targetting to double this figure in the second year, through this direct intervention method.

“There are some examples of MFI success stories,” says Somak Ghosh, President-Corporate Finance and Development Banking at Yes Bank. “But there are not enough organisations (in the country) that have achieved the scale that would enable us to grow. Hence, we decided to get into this business all by ourselves.”

In December 2006, Yes Bank inked a strategic partnership with Accion International—known for devising sustainable business models catering mainly to urban populations—to launch the Yes Microfinance India. This is a specialised division focused on developing tailor-made micro-finance products.

Yes Bank flagged off the business in July 2007, approving about four loans a week—to be raised to 15 soon—through individual loans to the urban slum dwellers of Worli, Lalbaug and Parel in Mumbai. From one office now, the bank plans to expand to three in the metropolis. And its scope of operations is expected to expand to other slum belts too, within Mumbai. Yes Microfinance India also plans to set up two offices in Delhi over the next 18 months.

But for others such as Jammu & Kashmir Bank (J&K Bank), a single geography is the niche—it plans to limit its activities within the state. The bank has devised niches among various customer segments—from apple growers to carpet makers, craft artisans, vegetable vendors to local dealers of the Sunday flea market in the state capital Srinagar.

“This business requires tremendous domain knowledge and we understand the local systems here better than any other player,” says Haseeb Drabu, Chairman of J&K Bank. “Micro-finance must be very localised and regional. However, we would gradually replicate our success stories here in related niche markets outside,” he adds.

Dedicated Micro-finance Branches

Development Credit Bank’s (DCB) plans in Gujarat are akin to carpet-bombing—it envisages to get into 1,000 villages in the state by leveraging the Aga Khan Rural Support Program, established by DCB’s founder, the Aga Khan Foundation.

The foundation is working in Bharuch, Surat, Junagadh and Surendranagar districts of Gujarat. More interestingly, the bank plans to set up a full-fledged branch dedicated to micro-finance in Dediyapada of Bharuch district. This branch is slated to begin operations in September this year and will serve as a hub to anchor the foundation’s operations in these 1,000 villages. DCB’s Managing Director and CEO Gautam Vir is looking to build a strong micro-finance portfolio of at least Rs 500 crore over the next 18-24 months.

HDFC Bank is not far behind in this effort. It has set up a dedicated self-help group (SHG) branch in Tamil Nadu. It now plans to set up a dozen more such outlets soon. “This calibrated effort would help the SHGs absorb, utilise and monitor credit in an optimal manner and grow the scope of business for all,” says Kishore Kumar, Executive Vice President and Head of Microfinance at HDFC Bank.

Alternate Distribution Channels

In a one-time initiative aimed at furthering its reach, J&K Bank recently paired up with the J&K state administration to issue about 21 lakh ration cards. The benefits of the exercise were two-fold for the bank. First, it was a medium of advertisement and direct marketing for it, where the product brochures and requisite forms were sent along with the ration card to the households. Second, the exercise provided critical household information to the bank.

“The data is very important and is helping us reach prospective micro-finance customers,” says Drabu. Of the 21 lakh cards distributed, around six lakh were to households falling in the below poverty line (BPL) category, which constitute the soft targets for hard micro-finance lenders.

Global Scenario

Among the international banks that take micro-finance seriously, there are three distinct types.

“There are not enough organisations in India that have the scale. So, we got into the micro-finance business alone” -Somak Ghosh, President, Corporate Finance & Development banking, Yes Bank

There are the specialised banks, which focus on micro-finance, such as Mibanco of Peru and K-REP Bank of Kenya, many of them with NGO origins and strong social missions; the mainstream banks such as Banco Caja Social of Colombia and Banco de Pichincha of Ecuador; and the state-owned development banks for which micro-finance is a public mandate, such as Bank Rakyat Indonesia and Banco do Nordeste of Brazil.

Multinational banks are also trying to drive synergies in their micro-finance operations in various parts of the world. For instance, Standard Chartered Bank recently pooled its MFI assets spread across 10-12 markets, including Africa and South Asia, and securitised them into one medium term note (MTN) programme, worth $125 million.

The bank also plans to offer its services as a conduit for multilateral institutions that are looking to enter the Indian micro-finance space, says Ranjan Ghosh, Regional Head-Financial Institutions, South Asia of Standard Chartered Bank.

Adds Sanjay Sinha, Managing Director of M-CRIL:”Indian banks would certainly continue to play a strong role in their partnerships with MFIs, besides developing their own direct micro-finance offerings.”

Indian and international banks seem to be operating on the same wavelengths in the micro-finance segment, but when it comes to innovations, there is little doubt that Indian banks are clearly leading the way.

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