The Hindu Business Line : ICICI Bank bets on micro-finance

Dr K.M. Thiagarajan, Chairman, Microcredit Foundation of India (left), and Mr Nachiket Mor, Executive Director, ICICI Bank, at a press conference in Chennai on Tuesday . - - Bijoy Ghosh

Chennai , March 9

ICICI Bank finds micro-financing good business. In India, some 400 million people, in 6-odd million villages, are waiting for small loans.

Only about 20 million of them have been served so far, by the organised financial sector.

But there are a number of problems in micro-financing, where the largest loans may not exceed Rs 30,000, such as: how to identify borrowers, high operational cost and collecting dues. To overcome these issues, ICICI Bank intends to tie-up with micro-finance organisations all over the country.

One such tie-up was announced today, with Microcredit Foundation of India (MFI), founded and run by Dr K.M. Thiagarajan, former Chairman of Bank of Madura. (Incidentally, Bank of Madura was merged with ICICI Bank in 2001).

Under the arrangement, MFI would facilitate formation of self-help groups and help them acquire capability to generate income for the group. Later, MFI would provide finance for the income generating activities. In all these areas, ICICI Bank would back MFI with the funds needed.

Announcing this, Dr Thiagarajan said, MFI was involved with some 10,000 SHGs in Tamil Nadu. The Foundation expects the number to go up to 50,000 in the next three years.

These groups are expected to need about Rs 1,250 crore, which ICICI Bank will lend, through MFI. Risks would be shared between MFI and ICICI Bank as per different, agreed formulae.

For example, MFI could bear the risk of the first 1,000 defaults, and leave the rest to the bank.

At a press conference here, Dr Nachiket Mor, Executive Director, ICICI Bank, said that the bank would tie up with some 20 micro finance institutions across the country. He said that today there are one million self-help groups and about Rs 2,000 crore of institutional credit has gone to them.

The bank intends to securitise the micro finance loans, get them rated and sell them off.

Dr Mor said he expects that the securitised paper (or bonds that will be issued against the stream of funds that will flow from the repayment of the loans) will get the best ratings, because the loans are almost default-free.

While MFI is likely to get funds from ICICI Bank at around 5 per cent, the borrower (the self help group) could end up paying in excess of 14 per cent, because of the high operational costs.

However, Dr Mor said that when the bank securitises the loan, it could get a spread of around 20 basis points.

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