ICICI Bank's K.V. Kamath: Unlocking the new rural business architecture

It's nearing peak summer in Paithan in Maharashtra's Aurangabad district; it's barely 10.30 a.m. but a thick blanket of heat has already enveloped the small town. In his first floor office at the dilapidated Nath Shopping Centre, indistinguishable from the millions of such brick and mortar monstrosities that dot the country's many small towns, Jaiprakash Yashwant Likhite wipes sweat from his brows and the sides of his moustache even as he talks animatedly in chaste Marathi with half a dozen farmers.

The clues to his identity: a plaque, saying 'Manager' dangling from the roof in front of his table, and a demat services counter and commodities trading terminal on the table next to his. Likhite quickly wraps up his conversation and shuffles across to the next table in his 250-square feet office, glancing through the live stock market quotes and replying to a couple of emails before returning to the 'Manager's' table to deal with his customers. Likhite is a franchisee of ICICI bank. Franchisee? Yes, these are people who provide banking services a la regular branches in small centres and far-flung settlements where it is not economically viable for the bank to set up branches. They receive a share of the profits they generate, but also have to share any losses.

Popat Srimant Rao, a farmer who has come with his two brothers from the nereby Brahma village, needs a Rs 50,000 crop loan. There is also Sanjay Sisode, who wants to apply for a rural housing loan. And there are others who have just come to enquire about interest rates and loan processing times. The people of Paithan, famous for Paithani sarees, understand interest rate dynamics very well. Many of them trade in the commodity market as well. And the 32-year-old Likhite's franchisee office (see The Rural Roll Out Plan) is the one-stop shop where they can do all these. Likhite's USP: he knows most of his customers by name; he has intimate knowledge of local conditions; and his minimal overheads translate into a tidy margin for him without any incremental rise in user charges. These advantages show in Likhite's performance: he has clinched over two dozen personal and crop loans over the last few months. ICICI bank plans to have such franchisee and kiosks (it can be a medical shop or an electronic store) at intervals of 10 kilometres so that channel partners like Likhite can help it tap rural customers. "They (local people) can exercise judgement based on local knowledge much better than us," says a confident Nachiket Mor, Deputy Managing Director, ICICI bank and Head of its Agri Business Initiative.

"Local people can exercise judgement based on local knowledge much better than us." Nachiket Mor Deputy Md, ICICI Bank

Likhite operates like a full-fledged bank, offering crop, housing and automobile loans, trading in shares and commodities and selling general and life insurance policies. Likhite and other franchisees are pressing strongly to be allowed to handle cash directly, but Reserve Bank of India (RBI) guidelines do not allow cash deposits or withdrawals outside bank branches.

Scalable Model

"This is a scaleable model," says K.V. Kamath, Managing Director & CEO of the bank, describing his "No White Spaces" rural business architecture-a mix of franchisees, micro finance instititions, NGOs and branches-that provides for "touch point" within 10 km of every rural customer. Every touch point is financially viable; branches are opened only where business volumes are large; other places are serviced by the so-called "non-branches". This is in contrast to the strategy of public sector banks, which have indiscriminately opened branches all over the countryside. Result: 80-90 per cent of their 60,000-65,000 rural branches are bleeding.

The ICICI bank model, which draws on the experience of fast moving consumer goods and telecom companies, has never been tried in banking. By partnering with franchisees like Likhite, ICICI bank is eliminating both the fixed and recurring costs of maintaining branches. "Our approach to rural banking is based on a partnership model," says Mor. Franchisees like Likhite even share business risks with the bank-they put up 10 per cent of all advances, pocket 10 per cent of profits and also share a similar percentage of any losses. There are also other franchisees who procure business for a fee but don't share the risks. If the model succeeds, it could become the template for all future rural banking initiatives not only in India but in other developing nations, and provide an alternative to the one pioneered by Bangladesh's Grameen Bank (see Poor Man's Bank). "Full-fledged branches will focus only on the rural rich and act as processing centres for franchisees and others," informs Brahmanand Hegde, joint gm, Rural Products & Credit, at the bank.

"The rural market is robust. We believe there are massive opportunities for us there," says Kamath. His strategy addresses all the issues involved in rural banking-it neatly circumvents RBI-mandated restrictions on branch expansion, it takes care of priority sector lending and enables the bank to cross-sell its various products in the highly price-sensitive hinterland without compromising on profitability (see It Has Grown 4-fold In Three Years).

ICICI plans to cover 6 lakh villages in 600 districts by 2008; that's effectively the entire country. It has already covered 60 districts.

Roll-out Plans

ICICI bank's rural rollout blueprint has a staggering sweep: it plans to cover 600,000 villages in 600 districts by 2008; that's effectively the entire country. In the first phase, it has already covered 60 districts mostly in the south and the west; this will increase to 200 by the end of 2006-07. "We are also tying up with NGOs and other community-based societies to deliver our products; they are closer to our customers and understand their language," says Hegde. The bank is training and equipping NGOs to handle its products and has already transformed 100 of them across the country into micro-finance institutions (MFIs).

Grameen Koota is one such MFI in Karnataka. Financed by ICICI Bank and several others, it provides cheap and quick credit to local villagers. Its recovery rate: 100 per cent. "The number of kendras (disbursal centres) have gone up from 12 in March, 2000, when we started, to nearly 2,000 today. The number of active borrowers have also risen from 130 to over 42,000," says Suresh K.K., coo of Grameen Koota. "We don't have to face the embarrassment of having to answer questions on our literacy and drunken husbands or provide sureties for the loans we need," says a local.

"The rural market is willing to engage with you in as sophiticated a manner as the urban market," says Mor. That's evident from ICICI bank's asset base. Its rural credit portfolio has jumped four-fold from Rs 4,206 crore in 2003-04 to Rs 16,300 crore last year (see The Big Picture). One reason for this rapid growth is its no hassles approach to speedy loan approvals. "We pay 1-2 per cent more interest on ICICI bank loans, but the procedures are clear cut and above board," say villagers whom Business Today spoke to. They allege that corruption is rampant in public sector banks. "We have to pay a 10 per cent commission there but approvals still take a month," they add.

Retail Banking

The bank's rural strategy is skewed in favour of retail banking. "The (rural) corporate lending business is quite risky. A single large default can hurt my business. I, therefore, prefer to deal with a large number of retail customers," says Likhite. Given this emphasis, it comes as no surprise that the share of ICICI bank's wholesale (rural) business is gradually coming down (see The Retail Pie). Incidentally, the rural retail sector has a default rate of 1-2 per cent, compared to 2-3 per cent for the rural wholesale sector and 5 per cent for the banking sector as a whole. ICICI, however, doesn't share its own figures. "A large and scattered retail portfolio cannot go bad in a single day," says Hegde.

The bank is also targeting the non-agricultural rural market. "We are also developing targeted products and strategies for this space," says Mor. "The idea is to bring about market linkages for agri-products like poultry, food processing and horticulture," adds Hegde. For instance, it has tied-up with Godrej Agrovet to deliver higher quality fodder for buffalos. It also ran a pilot project to enhance the yield of milch buffalows from 1-2 litres a day to 4-5 litres. However, the project had to be abandoned as only 60 farmers came forward to participate. But despite such hiccups, ICICI bank is happy with its rural initiative. Today, it has a rural customer base of 3.2 million, compared to just 20,000 just three years back; and it finances every third tractor sold in India. "We will aggressively reach out to rich farmers, rural businessmen and the rural educated classes with innovative, tailor-made products to suit their requirements," says Mor. "We are very clear about our goal. We want to reach the masses in a cost-effective manner," says Kamath.

But several large systemic potholes can cause problems en route to this goal (see Roadblocks). The biggest worry: there is no credible credit history bureau in rural India (the Credit Information Bureau of India Ltd, or CIBIL, only keeps records of credit card and urban retail loan customers), and farmers or other borrowers, refused a loan at one bank, can easily walk into another bank and apply for a loan, without furnishing any information on why the earlier application was rejected. "There is a need to provide farmers with unique identification numbers. We also need bio-metric fingure printing," says Mor.

These, he accepts, will take time. But that doesn't stop him from aiming high. He's reportedly set a target of increasing the share of ICICI bank's rural portfolio to 25 per cent of total advances by 2010, up from 10-12 per cent now. If he and his team can do that, Grameen Bank's business model will face some stiff competition from ICICI bank's new rural banking template.

-additional reporting by Rahul Sachitanand