Hitching the Wagon to Rural Banking

I noticed a story in Mint today about how ICICI Bank (India's largest private sector bank) "expects [its ] rural exposure to boost profit in 18 months." The story also stated that ICICI plans to expand its rural exposure to 25% of its total loan portfolio within two years.

Basically, ICICI has figured out that rural lending can be profitable, and it has decided to up the ante.

This is a very positive development for rural microfinance. While microfinance lending only constitutes a sliver of ICICI's total rural loan portfolio, the two segments are closely linked.

According to Indian Finance Minister Chidambaram, in rural India, 58% of farming households and 70% of non-farming households still lack access to basic banking services. ICICI currently makes loans as small as $100 in some of these areas.

ICICI's announcement that it plans to expand its rural exposure drives home the point that the rural unbanked, who are often less educated and poorer than their urban counterparts, are not risky pariahs to be avoided, but rather, present a growth opportunity to savvy, customer-oriented businesses.

As of today, ICICI already has more credit exposure to the rural microfinance space than any other private sector bank in India. This heavy involvement has come in two ways. First ICICI has extended credit, or issued debt in the form of term loans to Microfinance Institutions (MFIs) that on-lend to the poor and/or unbanked. Second, ICICI has pioneered a service company model through which it "partners" with MFIs, allowing the bank to lend directly to village borrowers. ICICI uses these MFIs as a conduit to disburse and recollect loans to the poor. It pays the MFIs a fee for use of their credit, distribution and collection agents. The loans remain on ICICI's books, and correspondingly, help it meet certain legal "priority sector" lending obligations.

While microfinance loans have often been seen as a chartible function to be financed by donations from large corporations or government grants, the fact that ICICI's rural lending business (which operates in areas where distances between customers are greater, transaction are costs higher, and political and geological risks can be more volatile) will now add to the bottom line is another piece of evidence building the case that banking the unbanked is not simply something to chalk up to corporate and social responsibility. Rather, it can be a profitable and sustainable part of a mainstream financial services business.

Comments

[Nitin]

Mark, as you say, 'present a growth opportunity to savvy, customer-oriented businesses'

The promises of bountiful harvest at the much cliched bottom of the pyramid makes this an oppurtunity to run for.....but on the flip side interest rates in excess of 20% and as high as 28% in microfinance is something not customer oriented.

And if this investment come within the compulsory 18% under priority sector, this offers more returns than any other type of credit supplied and also a very mushy cushion against defaults

Agree with you on everything else :)

But also, I am really not updated on recent development related to MF, if I am wrong, please correct.....Thnx

[Mark Straub]

Nitin,

Thanks for commenting. Well, I do believe that the MF business presents an opportunity to lending organizations that pay attention to and, over-time, nurture the needs of their borrower clients. However, as I'll try to make the case in up-coming blogs, there is a reason rates as high as 20 or sometimes 28% get charged, and it comes down to the cost of providing credit to people who are hard to reach. Most MFIs do hand-held, doorstep lending, that is, they travel to the borrower, often they educate the borrower on personal finance and money management, and follow up with the borrower on a regular basis at their home or place of business. Doing this generally involves travel and time, both of which have costs associated with it. Check my post on moneylenders here http://bankerinindia.typepad.com/my_weblog/2007/01/my_friend_the_m.html
to get a sense of what the market rates for these kinds of loans are (north of 70%) when there are no MFIs.
Best,
Mark