Gargi Banerjee
Maruti Nathu Gadge is a sugarcane farmer from Rahuri, a village in the Ahmednagar district of Maharashtra. Last year’s unusually heavy rain had left his crop a soggy mess. So, he needed to borrow money to get ready for a new crop this year. Gadge was wary of moneylenders and babus of co-operative societies, whom he would have had to bribe before getting any work done. He was in a fix: where could he get the money he needed to get started? He then happened to walk into Sanjay Jambukar’s tent on a bazaar day in his village.
Jambukar is an ICICI Bank bhai, and a part of the marketing team of the ICICI credit access centre at Rahuri. He explained to Gadge that the bank would give him a crop loan of Rs 32,000, enough to prepare his field for the next harvest. The only documents that he had to give the bank were his saat-baara (the land deed) and his ‘Seshan’ card (the voter’s ID card). Gadge complied. His loan was processed in less than a week by the ICICI Bank branch at Ahmednagar.
Around 300 km away from the dusty fields of Rahuri, at the imposing headquarters of ICICI Bank in suburban Mumbai, small loans such as these are adding up in the books of the country’s second-largest bank to give its rural push a momentum of its own. Deputy managing director Nachiket Mor is in charge of driving ICICI Bank deep into the rural hinterland. In a mere six years, the bank’s rural portfolio has grown from nothing to Rs 16,300 crore, and now accounts for over 6 per cent of the total bank assets of Rs 2,51,300 crore. This loan portfolio grew at over 50 per cent in the last two years. The bank now has a presence in 220 districts. Mor is, however, not resting on his laurels. He is keen to plant the bank’s flag in 450 districts by 2008.
To achieve this stiff target, he is encouraging innovations in distribution, product design and technology. Where it is viable, ICICI Bank is actively seeking out partners with local knowledge to help it service its emerging rural clientele more effectively.
Much of this is new to the hidebound world of Indian banking. Traditionally, rural banking has been seen as a social obligation rather than as a profit opportunity. It was thrust down the throats of banks by the government. Mor and his team are trying to combine social obligations and profitability. That puts them square within the larger task of reforming rural India — everything from building rural supply chains, to providing risk management tools to farmers, to working creatively with microfinance groups. Mor believes that in almost every region of India, there exists a set of economically viable occupations that even the poorest of the poor can engage in, if the necessary inputs are provided to them at market prices.
“Access to basic financial services, which include savings, credit, insurance and tools for risk management can allow families to start with extremely low-skilled occupations, such as buffalo rearing, and then gradually move up to a level where they can afford minimal meals and even come to a point where their children are withdrawn from the work force to attend school,” he says.
ICICI Bank CEO K.V. Kamath has identified the rural foray as one the key drivers of revenue growth in the coming years. He meets the core team every fortnight. Kamath believes that the Indian economy can be put on a firm footing only if the benefits of economic growth percolate down to rural India. His vision is to provide the whole range of financial services to people in rural areas, so that they can be brought within the ambit of mainstream economic activity.
Genesis Of A Strategy
The push into rural India began at the end of 1999, when USAID provided money to the Indian government to finance activities that would assist the development of a dynamic private agricultural sector in India. The programme was called the Agricultural Commercialisation and Enterprise (ACE) Programme. ICICI was chosen to be the implementing agency. A two-member team comprising Brahmanand Hegde and Zarin Daruwala was in charge of ACE. Then came ICICI Bank’s acquisition of Bank of Madura in 2001. While ICICI Bank had grown out of the industrial lending strengths of ICICI — its parent — and had then made a very successful foray into consumer lending, it had almost no strengths in lending to farmers and others in rural India.
Bank of Madura, on the other hand, had a substantial rural reach. Its core
strength was mass banking. In April 2000, Kamath asked Mor, Chanda Kochar and the
members of the ACE team to form a separate team to explore opportunities in the rural areas.
Despite the hue and cry about the need to have an inclusive banking system, 58 per cent of rural households do not have a bank account and only 21 per cent have access to credit from a formal source. That is the opportunity in rural banking. Says Mor: “The banking system, thus far, was not able to internalise lending to the poor as a viable business activity, but looked at it as a mere social obligation. We wanted to change that.”
In 2005, Suvalaxmi Chakraborty, who was then in ICICI Bank’s retail business, took charge of the rural, micro banking and agribusiness group (RMAG). It was only after this that ICICI Bank’s rural push really took off. A team of 10 members at the centre is now functioning as the nodal point of RMAG. They handle portfolios from product and credit development to legal and regulatory compliance, and are more innovators than anything else. RMAG is the new kid on the block for the largest retail loans provider of the country today.
Says Chakraborty: “We have developed a robust hybrid channel structure with a combination of branch and non-branch channels. Biometric cards and rural ATMs further aim to bring convenience that aid our efforts to bring doorstep banking to rural India.” The bank currently has over 200 rural branches, 1,500 credit access points and 5,000 kiosks.
Mapping The Possibilities
Today, the RMAG’s focus is on a rural strategy that is different from its predecessors, who used the same channels to cater to all customer segments in rural India with a narrow product suite and branch driven infrastructure that was expensive. ICICI Bank changed all of that by first dividing its rural customers into four categories: from R1 to R4 (see ‘ICICI Bank’s Rural Pyramid’). It built a strategy that was customer driven, technology-intensive, used hybrid channels and offered multiple products.
Lessons are being imbibed from other countries. Says Madhavi Soman, consultant, RMAG: “We visited the Netherlands, Chile, and Israel to understand the function of farmers. We found that Indian farmers are not aware of the end-consumer of their produce, while every farmer overseas is producing for the supermarket buyer. While we have an excellent crop of several fruits, we are not very large exporters as we do not meet international standards. We are trying to anticipate trends and are assisting in creation of markets as well.”
The RMAG business has two categories: corporate agribusiness and rural retail business. Corporate agribusiness is what the bank had started out with. This business comprises direct lending to large corporates, poultries like Godrej Agrovet and Venkateshwara Hatcheries or seed companies like Suguna, in the form of term loans for project expansion or working capital loans. There is also the corporate linked SME model that does dealer or vendor financing, or corporate linked farmer financing. Programme-based lending is also undertaken to understand the SME sector.
On the rural retail side, the bank offers a basket of asset products: working capital loans, crop loans (like the one given to Gadge), farm equipment loans as per the requirement of the farmer at any stage of his crop, and even commodity financing when his produce is ready. For the poorer segment of farmers there are micro-finance options and jewel loans. On the liability side, there are current accounts for agri-traders called Agri Express Funds, term deposits and even other investment products like insurance and mutual funds provided by ICICI Lombard and Prudential ICICI.
The Distribution Network
The bank is making use of both branch and non-branch channels to reach out to the rural populace. Branches are classified under three categories: district cluster processing branches in locations with high agri-rural potential, which is the processing hub for all channels. A typical example is the Ahmednagar branch that BW visited. It caters to mostly sugarcane and onion farmers in the area. Second, there are mandi branches that focus on servicing mostly agri-traders, giving them facilities for commodity training and insurance. Third, there are the crop cluster branches located in belts of growers and processors of specific crops that specialise in local knowledge and relationships and provide the farmer finance for specific crops.
Non-branch channels include credit access centres that are repositories of local customer knowledge. These are typically located in a district head quarter/taluk or a larger village in a district. Take, for instance, the ICICI Bank credit access centre at Rahuri. Anup Bihani is the credit access centre manger here, the man who has brought a smile on the faces of hundreds like Gadge. A third-generation entrepreneur, Bihani has roped in his father, Ashok Bihani, a senior citizen who has been entrusted with the job of hand-holding farmers who walk into his son’s ‘office’, which shares a common wall with his two-wheeler showroom. While Anup is busy coordinating with his seven-member marketing and research team, Bihani senior ensures that the farmer feels at home, reassured many times over that he is not going to be duped.
That’s not all. A few kilometres away from the credit access centre, there’s another ‘touch point’ of ICICI Bank. Chandreshekhar Kharde is a passport agent who runs the ICICI Bank Internet kiosk, located at a distance of approximately 5 km from the credit access centre at Rahuri. Kharde was selected by officials of the Ahmednagar branch along with Bihani to run the kiosk because of his network and his local know-how of the credit worthiness of farmers in and around Rahuri.
Apart from the credit access points and Internet kiosks, there are the MFI branches that are platforms to reach out to the rural poor, like Spandana at Andhra Pradesh, which is targetting the R4 segment and is a facilitator for ICICI Bank’s micro loans, savings and insurance. And, lastly, there are some recent additions to the retail network — business correspondents like the KAS Foundation in Orissa that is providing banking to the under-banked areas. Their business opportunities range from opening savings accounts and sale of third-party products, to loan disbursements and collections.
Hand In Hand With Partners
ICICI Bank has worked out a No White Spaces (NWS) strategy, which means that there are plans to ensure that there is going to be an ICICI Bank ‘touch point’ within every 3-4 km of reach of every Indian, even in the most remote corners of the country. That would mean around 100 touch points in every district — or 45,000 totally by 2008. “So far, we have been able to establish 8,000 touch points and are trying to significantly scale up this number,” says Mor.
The bank will leave no business opportunity in a cluster untapped by combining the use of branch and non-branch channels. There are 80 ‘cluster CEOs’ across India, who are senior bankers in charge of two or three districts, not necessarily based out of a rural area, but well versed with the locals. It is their job to roll out the NWS strategy. The number of cluster CEOs will increase from the current 80 to 150 by the end of 2006. “I have online chat sessions with my cluster CEOs once a week, which helps us identify more opportunities that lead to more innovations,” Mor explains.
ICICI Bank is also working on a partnership module with micro-finance institutions. The bank initiated a partnership model in 2002 in which the MFI acts as a collection agent instead of a financial intermediary. The loans are contracted directly between the bank and the borrower, so that the risk for the MFI is separated from the risk inherent in the portfolio. This model, therefore, has very high leveraging capacity, as the MFI has an assured source of funds for expanding and deepening credit. The bank chose this model because it expands its retail operations by leveraging comparative advantages of MFIs, while avoiding costs associated with entering the market directly.
Another challenge ICICI Bank found was scaling-up the micro-finance sector and the lack of equity capital. To solve this shortage, ICICI Bank is encouraging venture capitalists (VC) to enter the sector. The bank has identified three venture capital funds — Lok Capital, Aavishkar and Bellwether. Lok Capital mobilises and directs private capital to micro-finance activities and to fund long-term management and technical support for development of commercially sustainable MFIs. Aavishkar provides micro-equity funding (Rs 10 lakh-50 lakh) and operational and strategic support to commercially viable companies in rural or semi-urban India. Bellwether has made three equity commitments for start-ups, and its committee has decided to increase the size of the fund from $10 million to $25 million.
ICICI Bank has come to an agreement with these three VCs, under which it will provide take-out financing to the MFI to buy out the venture after a period of 3-5 years, provided the MFI attains an operational sustainability rating from Micro-Credit Ratings International and Credit Rating Information Services of India. The ICICI Bank technology team is developing innovative products to help reduce transaction costs considerably. For instance, a new technology is being used for rural ATMs using a suction technology and dispensing notes from below the machine. It is able to handle old currency notes. Though the ATM is still being improved for a full-scale roll out, there are already two that are operational within IIT Chennai, which assisted them in building the ATM, and another in a village in Tamil Nadu.
Also, the bank has recently taken a stake of under 20 per cent in Financial Information Network and Operations (FINO) to provide technological solutions to reach the underserved in the country. ICICI Bank is the lead facilitator. FINO has launched biometric card, which would act as a proof of identity and give collateral to customers. The card would also offer multiple products including savings, loans, insurance, recurring deposits, fixed deposits and remittances. FINO would also build-up a customer database, thus bringing them into mainstream banking.
While the sector has been growing rapidly, and the focus has been on outreach, there is an urgent need to fill gaps both in practice and understanding, in order to maximise the impact of this growth. To fill these gaps, ICICI Bank has created the Centre for Microfinance Research (CMFR) at the Institute for Financial Management Research (IFMR) in Chennai. Through research, research-based advocacy, high-level training and strategy building, it aims to establish the links between increased access to financial services and the participation of poor people in the larger economy.
The CMFR is involved in several studies with researchers from universities like MIT, Harvard, and Yale. For example, it is implementing an impact evaluation of Spandana’s microcredit programme in Hyderabad. As the first randomised evaluation of microcredit, it will allow estimating the effects of the MFIs’ programme in an unbiased manner. Other projects include the impact evaluation of smokeless chulhas on health and productivity in Orissa, a study on the break-up of transaction costs of MFIs and SHGs, and an analysis of Sewa Bank’s loans and accounts panel database in Ahmedabad. The CMFR also organises regular seminars and conducts courses for managers, researchers from NGOs, government, international organisations and academics.
Obviously, banking with rural India cannot be done effectively without first understanding its complexities.
