The world’s poor traditionally are trapped in the dilemma of having neither money nor the means to borrow any. Microfinancing to the level of their needs has not been part of the agenda of formal banking, until now. For the poor in India, particularly in rural areas, ICICI Bank, the second-largest banking institution in the country, is beginning to convert the poorest of the poor into customers, and thus at the same time empower them.

Ms. Pundiselvi, in the village of Nahramalaiphur, for instance, procured a bank loan to lease a small parcel of land to raise chilies for cooking and flowers for decorative purposes. The cost of the land was 10,000 rupees ($200) for the season, and the seeds cost a few thousand rupees. So far, Ms. Pundiselvi has paid back 7,000 rupees ($140), or 70 percent of the loan, from income generated from her land. In the same village, Ms. Saraswathi owned and operated a small grocery shop with a small inventory and limited selection of goods. With a 10,000 rupees ($200) loan, she expanded her existing shop and now enjoys a boost in monthly income. Ms. Saraswathi has never missed a monthly payment and has paid back 6,000 rupees ($120), or 60 percent of her loan. One enterprising woman pooled the money from a loan with other family assets and dug a new well for her village. She charges other farmers and villagers 25 rupees ($.50) per hour to pump water for irrigation purposes. The irrigation system the pump feeds has also increased the yield of her own nearby fields.

The number of people living on less than $1 per day in India is significantly greater than the entire population of the United States. From a social perspective, this is a humanitarian pandemic. From an economic perspective, these people represent the bottom of the pyramid. From a commercial perspective, these people, given their miniscule individual purchasing power, are usually not considered a viable market.

Traditionally, banking in India has focused on upper-income groups, principally in urban areas. With a rural population of 741.6 million in India, the rural penetration of banks is as low as 18 percent.^[1] Microfinancing, even in the formal sector, has existed for some time, but it usually has been characterized by its nonsustainable donor-led model. The primary focus of microfinance institutions has been access to credit, a very capital-intensive process. Microfinance institutions have generally ignored the other plank of banking: savings. Also, most microfinancing lending goes to people who are not at the bottom of the economic pyramid (the poorest of the poor).

The poor of India, in the absence of formal institutions, often must resort to the informal sector, which is characterized by monopolistic practices and exorbitant interest rates—at times even in the form of human capital. “Informal systems may be inefficient and even exploitive due to their monopoly power. Interest rates in the informal market vary from 3 percent to 10 percent a month. Vegetable vendors are known to borrow at even 10 percent a day to finance their daily working capital needs.”^[2] Yet formal financial intermediaries, such as commercial banks, typically do not serve poor households. The reasons include the high cost of small transactions, the lack of traditional collateral, geographic isolation, and simple social prejudice.

The government of India has been aware of and sensitive to the asymmetric access to banking. “Of the 428 million deposit bank accounts in the country, 30 percent are in the rural areas. With a rural population of 741.6 million, the rural penetration of banks...is as low as 18 percent.”^[3] The Reserve Bank of India, through the Rural Planning and Credit Department and National Bank for Agriculture and Rural Development, has instituted several policies to encourage rural banking and the extension of credit to the rural hinterlands. The first was an initiative that required banks to open one rural branch for every three urban branches opened. As stipulated in Section 22 of the Banking Regulations Act of 1949, “Private sector banks ... are required to open a minimum of 25 percent of their total branches in Rural/Semi Urban areas as a condition of the license issued to them....”^[4]

The Reserve Bank of India, also through the National Bank for Agriculture and Rural Development, started a pilot project in 1991 for purveying microcredit to the rural poor by linking self-help groups (SHGs) with banks. “A healthy microfinance sector leads to a healthy finance sector in general. This mutual link has to be established by the microfinance institutions/nongovernmental organizations and realized by the policymakers.”^[5] This pilot project was initiated because, despite having 150,000 rural banking outlets, a 1981 Reserve Bank of India survey found that 36 percent of the rural poor still utilized informal sources of credit. The project, the SHG-Bank Linkage Program, encouraged state banks with rural branches to give loans directly to self-help groups as opposed to leaving the onus of bottom-of-the-pyramid credit to microfinance institutions.

Government initiatives, though great for the development of the Indian countryside, were viewed by most banks as developmental and, thus, nonprofitable. Providing credit to poor farmers and opening costly rural branches were seen as loss-making or break-even propositions at best. ICICI, however, viewed these reforms as an opportunity. K. V. Kamath, CEO and managing director of ICICI Bank, stressed that ICICI “...wants to lend in a sustainable way to rural India.”^[6] ICICI took a proactive approach when entering the retail banking sector, not only to satisfy the Reserve Bank of India regulations, but also to go above and beyond. “In the true ICICI style, we said if we have now acquired this initiative, let us see in what way we can actually make this initiative truly scalable.”^[7]

As a commercial entity with shareholders to satisfy, ICICI Bank could not enter this market aggressively unless they were convinced it could be done profitably. “At the ICICI Bank, we were very clear we would not restrict this initiative to be a mere marginal experiment. We decided we wanted to actually develop a model that not only is scalable, but is low cost and commercially viable.”^[8] Thus, the management of ICICI entered this market fully convinced it could be a profit-making venture. With this market in mind, ICICI outlined three strategic goals: to increase banking penetration in rural areas through innovative ways of defining distribution points, to prepare rather than react to the increasingly important rural market, and to support the downtrodden as a good corporate citizen.^[9] All these goals were aimed at enabling the poorest of the poor to “... become active and informed participants in socioeconomic processes as opposed to passive observers.”^[10]

ICICI was well situated to take the lead in rural banking. ICICI was a universal bank providing a wide range of banking services and was technologically driven. For example, ICICI was the first bank in India to launch a Web site (1996), the first bank to launch Internet banking (1997), the first bank to launch online bill payment (1999), and the only bank in India with more than one million online customers. ICICI’s channel usage reflects this technological approach toward banking. “If you are going to gain sustainable competitive edge, you have to leverage technology in a big way. Our aim was to move from physical branch banking to virtual banking. Block by block, we slowly built up a clicks-and-mortar strategy.”^[11] This progressive and imaginative use of technology was a vital key to ICICI’s ability to serve the bottom of the pyramid profitably.

ICICI was also a new entrant to retail banking. ICICI started retail banking under a new and changing regulatory regime that was decidedly more market based than before. As a new player in this environment, ICICI was not burdened with legacy thinking and could attack the issue with fresh ideas. Additionally, ICICI was not hampered with a large physical branch network, and was therefore well positioned to introduce low-cost banking channels. In contrast, the State Bank of India, one of the oldest and largest banks in the country, had to financially support a network of more than 13,000 branches.^[12]

As ICICI oriented the banking operations toward the bottom of the economic pyramid, they began looking at entering the microfinancing field since there certainly was, and still is, a vast unmet demand for credit in rural areas. “In rural areas, only one million households have received access to microcredit from microfinance institutions.”^[13] Yet the competitive situation was relatively crowded. “India currently boasts more than 500 microfinance institutions.”^[14] However, the incumbents in this space were all struggling to turn profits since they were used to working as donor-funded and -supported institutions. This dependence often affects scalability and sustainability. Additionally, these microfinance institutions were experiencing low savings-to-credit ratios, liquidity problems, high “capacity building” costs, and general inefficiencies. ICICI saw a real opportunity in this area, believing that many of the problems/risks with microfinancing could be alleviated by the capital, expertise, scale, and reach of a major bank. By entering the microfinancing field, ICICI has taken on the role of social mobilization as well as financial intermediation.

In addition to looking at microfinancing, ICICI wanted to increase their banking presence in rural areas. To do this, the bank needed to rapidly proliferate their points of presence (or distribution points). However, the traditional brick-and-mortar approach to expansion is prohibitively expensive given the vast and varied landscape of India. Additionally, it is difficult to staff rural branches with competent bankers because educated urbanites do not want to live in these areas and often there is a dearth of qualified locals. To minimize the costs associated with expanding rapidly and to gain qualified rural staff, ICICI decided to partner with nongovernmental organizations and microfinance institutions currently in the field. By “piggybacking” on the established network of these rural-oriented players, ICICI believed it could gain knowledge about the market they intended to serve and eventually increase their banking presence. ICICI has combined the social mobilization strength of nongovernmental organizations and microfinance institutions with the financial strength of the bank.

ICICI developed two innovative models geared toward serving the bottom of the economic pyramid:

Upon entering the new millennium, ICICI’s executive team had identified three areas as the next sectors of growth: international, urban retail, and rural retail. With the rural sector targeted as an important driver of growth, ICICI began looking for a suitable partner. They identified the Bank of Madura as a profitable, well-capitalized private-sector commercial bank in operation for 57 years. The main advantages for ICICI were the addition of 1.2 million customers and the Bank of Madura’s rural branch network. The Bank of Madura’s most significant presence was in the southern states, with 77 branches in the rural area of Tamil Nadu. The Bank of Madura was especially strong in small and medium-sized corporate banking, which would help ICICI expand their corporate business. An additional strength was the Bank of Madura’s microfinancing initiative. ICICI made it clear they intended to aggressively grow this initiative. The Reserve Bank of India approved this merger on March 10, 2001. With the merger, ICICI Bank became one of India’s largest private-sector banks.

Earlier, the Bank of Madura, familiar with the Grameen Bank model in Bangladesh (providing small loans to clients below the poverty line), believed the efforts in Bangladesh could be replicated in India. In 1995, they developed and implemented the Rural Development Initiative, focused on economic empowerment of the poor in rural areas. To begin, they had to find the right people. Word spread quickly throughout the organization of the new and prestigious program. The Bank of Madura had reversed the negative perception of the rural managerial positions by creating a lengthy interview process for what was previously deemed a marginal job. Applicants were turned down if they expressed the slightest hesitation regarding the demands of the job or the time frame for the post. In addition, existing personnel in the rural branches were reviewed, and those who did not match relevant profiles were weeded out. The applicants had to have the desire to help the poor and become personally involved with their economic development.

The interview process produced a team of 325 individuals and a core executive team of 15. The bank also initiated a new policy that stipulated that any individual working in the rural sector could request a transfer at any time. This was a perk for the rural field agents and added to the allure of the position. Then, the team had to learn the intricacies of microfinancing and how to make it successful. They began a serious study of microfinancing with experts around the country; after all, many nongovernmental organizations and academics were already active in this area in India.

After a number of consultations with outside experts, the core team held their own two-day retreat and decided the strategic and organizational directions the bank would take next. The program was placed under certain restrictions: no additional expenditures, including for new staff; operating costs to remain the same. Over the course of the retreat, the team decided that the clients, bank, and program would be better served with their own unique program. Of course, they drew upon many important lessons they had seen in the field from other players; however, with the financial backing of the savings institution they represented, they saw a new opportunity for themselves. The essential strategic design of their program was to form, train, and initiate small groups of women into formal savings, banking, and lending groups. The vehicle conceived for this was the Self-Help Group (SHG).

The Bank of Madura’s conception of the SHG was as follows:

After one year of training and monitoring the regularity of meetings, loans were dispersed to the group in the average amount of 10,000 rupees ($200) per member. This was a considerable loan, above the amount normally given for consumption purposes, to begin a small business or expand an existing operation in agriculture, for instance. The loans were given based on need, not in ratio to existing savings deposits.

The Bank of Madura’s SHG vehicle allowed for many other positive intangible changes in the participant’s self-esteem and confidence as they were allowed to decide on and influence events in their own homes and villages. The maturation of an SHG followed the general pattern shown in Figure 1.

Figure 1. Maturation of SHG.

At the time of the merger between ICICI and Madura Bank in 2001, there were 1,200 SHGs already formed; a social vehicle with considerable power had been created. Women participating in the SHGs found themselves becoming more articulate, confident, and empowered. The focus of the SHG movement was on the maturation of the individual and thus the group as a whole by enforcing a strict meeting schedule and savings regimen. Ultimately, federations were formed, representing large numbers of SHGs that included thousands of members. The rapid spread was due in part to the training structure the Bank of Madura provided.

The greatest difficulties the SHG program had to face first were intangible. How would a bank raise the confidence and motivation of a group of women without familial relation, without incentive to trust one another, without any formal participation in the financial sector? Further, a stigma was attached to formal banking, that it was not a trustworthy institution. This mistrust was based on prior experiences some of the women had with bank loan officers who demanded bribes and wrapped the entire savings and loan process in obscurity to confuse the locals.

The potential candidates for the SHGs, of course, understood their needs very well but had not been actively seeking alternatives. The answer to developing the group dynamic lay in the composition of the groups, so that a feeling of mutual dependence was immediately created, not merely financial but also psychological. Additionally, the framework that created a joint guarantee for the loan of all the members was vital. This joint guarantee encouraged interaction between women who formerly would not have had any (or very little) reason to engage with one another. Eventually, a small number of groups began forming, and the members soon felt the benefits, initially in the form of increased confidence, the mutual benefit of cooperation, and other externalities of a diverse and established support network. Concepts of citizenship were developed; that is, members began to recognize their duty to the communal setting in which they played a role. As time passed, established groups and their most proactive members were trained to form new groups, which spread the SHG movement at an accelerating pace.

To date, there have been many instances of total transformation, not only of the individual’s self-confidence, but also of village politics, ethics, and social norms. The SHG units began to develop a fierce identity both for themselves and within the context of the larger SHG network. Members of the SHGs adopted a certain color and style of sari to demonstrate their solidarity. The hustle and bustle at the local bank offices has become a flurry of blue, maroon, and yellow robes as the women go about their daily business. Songs and ceremonies have emerged celebrating the SHG unit and are offered at the commencement of each meeting to bring the members together in thought and act.

When ICICI inherited the Rural Development Initiative from the Bank of Madura, the SHG program was still not financially sustainable. To reach profitability, the number of SHGs had to expand exponentially without increasing ICICI’s costs of managing these groups. ICICI developed a simple three-tier system. Under this system, the highest level is a bank employee called a project manager. Project managers oversee the activities of six coordinators, approve loan applications for the area manager, and help with the development of the SHGs. The coordinator is an SHG member with a contractual relationship with the bank. She overlooks the actions of six promoters. The promoters’ primary responsibility is the formation of new groups. Within a year of election to promoter, promoters become social service consultants (SSCs) and must form 20 groups within the next 12 months. If the groups are formed, the SSC is financially compensated by the bank and becomes part of the pyramid structure of creating and monitoring the SHGs.

Under the ICICI model, Self-Help Groups form and expand in a pyramid structure. In early 2001, at the time of the merger, 1,200 SHGs had been formed under the Bank of Madura structure. By March 2003, more than 8,000 SHGs had been formed. The acceleration and success of the program depended on training and empowerment of the women participating in the existing SHGs. At a certain degree of maturity, existing members who have demonstrated leadership ability are trained by the bank to become SSCs. The SSC’s primary responsibility is to form new SHGs in neighboring villages and thus expand the SHG network. ICICI provides a small financial incentive of 100 rupees for each new group formed, and the Social Service Consultants must fulfill certain quotas to retain their status. The SSC must travel to villages within a 15-kilometer radius and form five new groups within two months and 20 groups within 12 months. ICICI has set strict guidelines for potential membership: All members must be from the same village; they must be married (to ensure a family receives the benefits, too); they must be between the ages of 20 and 50; SHGs must focus on the illiterate and those existing below the poverty line.

The National Bank for Agriculture and Rural Development created a list of questions to determine the poverty level of a family and to assess eligibility for SHG participation:

Those who answer yes to three or four of the questions are considered good candidates for the SHG. After a series of visits with multiple families, plans for the group formation begin. The most successful groups have members who share some sort of similarity (perhaps they are from the same caste or have had a similar experience of poverty, for example). Before the first SHG meeting, the Social Service Consultant meets again with the village elders and gets their permission to work on a more significant level with the village to aid its development.

The National Bank for Agriculture and Rural Development estimates that the process of group formation can take five to six months. In the first few meetings, it is not unusual for members to leave and new members to arrive. Once a core set of members has been established, a leader must be selected along with two animators. These three women are agreed on by all members and share the duties of running the group and keeping the accounts. The animators keep the minutes book (which details the proceedings of the meetings), the savings and loan register, the weekly register, and the members’ passbooks. Proper documentation of the activities, especially of the internal lending, will help the approval process from the bank. The preliminary meetings also include Basic Awareness Training given by a Social Service Consultant (SSC), coordinator, or project manager. The SHG also must agree on the meeting times, penalties for missed meetings, and repayment guidelines.

The motto of the Self Help Group becomes Savings First—Credit Later. They are taught that the savings habit is crucial to their rise out of poverty, in that savings reduce their vulnerability to consumption and medical emergencies. After the group has gone through training and begins to gather its own momentum, the SSC leaves to form new groups, but is still responsible for a degree of monitoring and training assistance. After the Social Service Consultant has formed 20 groups, she will have earned 2,000 rupees ($40) from ICICI Bank and will then become a promoter. During this process, she will have reported her activities to her coordinator. In the SHG hierarchy, a coordinator overlooks the activities of six Social Service consultant/promoters who have fulfilled their quota of forming 20 groups within one year. Similar to the Social Service Consultants, promoters are selected on the basis of talent and skill. With each promoter in charge of 20 groups, the coordinators overlook the activities of 120 groups. ICICI provides them an annual salary of 2,400 rupees ($48) for the 120 groups or some proportional piece thereof depending on how many are formed. The coordinators and the promoters work closely with the bank personnel who support their efforts. They are not considered official employees of the bank, but as contracted agents who perform a very particular function. These women have passed through various levels of election and are considered to be the most talented and motivated members. Of course, they began as members within a particular SHG and continue with their duties to that original vehicle. Within the official hierarchy of ICICI, managerial positions support the efforts of the SHGs and their various executives, as shown in Figure 2.

Figure 1.2. SHG management structure.

The SHG process is oriented toward building new disciplines and capabilities. Collective responsibility and group pressure act as social collateral. Toward this end, the process has three essential steps:

In the first monthly meeting, each member must bring 50 rupees ($1) to contribute to a joint savings account with the other members. The leader and representatives are responsible for collecting this money and opening up the savings account for the group. Instructions have been issued by the Reserve Bank of India to all commercial banks to allow registered and unregistered SHGs to open savings accounts in their group’s name. It is imperative that each woman contributes and participates each month. This begins to build the momentum of savings that ICICI believes is essential for greater economic independence.

After six months, they have amassed 6,000 rupees ($120) plus interest. At this point, the idea that they are contributing to something that is able to expand beyond their individual means is evident. The savings are converted into a fund. The group can access this fund and use it for emergency lending to an individual within the group. This marks the first step in a transition to formal lending and a departure from the dependence on the local moneylender. Emergency lending is available for immediate payment of a medical emergency, short-term borrowing for consumption purposes, or other health-care reasons. This emergency loan is short term, and the women pay an interest rate of 24 percent per annum to the account. The members know, even if they have little or no education, that these loan terms are desirable compared to dealing with moneylenders. They compare the internal rate of the SHGs with the informal rate, which can be as high as 10 percent a day.

Often, monthly meetings take on a completely different agenda. Generally, the activity revolves around the needs of the village and other concerns of the women. In Tamil Nadu, water availability and purification, transportation, and electricity were the most highly debated topics. The SHG allows women to stand together as thousands, and local politicians take them seriously. Chanda Kochhar, the executive director of Retail Banking at ICICI, related stories of women who had rarely stepped out of their homes before joining the SHG. Through working with their peers, they gained such a degree of confidence and esteem that they began debating with local politicians on such issues as the construction of a dam and the digging of a well. SHGs also focus on literacy training.

One year after the formation of the SHG, the women are ready to submit a loan proposal to a bank manager, a relatively paper-intense process. Key supporting documents are required, including loan agreements signed by each member of the SHG, an updated family survey, a No Due certificate that guarantees that no outstanding loans are owed by any member, and a Letter of Sanction approved by the area manager. The size of the total loan to the SHG is 250,000 rupees ($5,000), with a distribution of 12,500 rupees ($250) to each member. Activities that can be funded with this amount include the purchase of livestock, the leasing of land for agricultural purposes, the opening of a small tea shop, candle manufacturing, and the purchase of a home. These loans are noncollateralized. The savings account cannot be held as collateral against the loan, because the bank wants to continue encouraging the internal lending process. However, the SHG as a whole is responsible for each member’s loan, which builds a strong degree of social collateral. This social collateral has proved able enough to achieve a repayment rate of 99.99 percent, making the rural sector one of the most creditworthy in the banking industry. To fulfill the repayment terms, each member must pay 400 rupees ($8) to the bank for 43 months, an effective annual interest rate of 18 percent. Within India, this is higher than most home loans, which are in the area of 9 percent, and other commercial lending at 12 percent. ICICI charges this rate to cover the training costs and salaries of the promoters and coordinators who make this operation sustainable.

The National Bank for Agriculture and Rural Development has correlated high repayment rates with certain characteristics of SHGs, as follows:

If the SHG meets a certain number of these criteria, the loan officer is instructed to grant the loan immediately. If the SHG is lacking in many areas, the loan application is suspended, and they are granted four to six months to improve their operation. The officer is also encouraged to examine the books of the SHG and determine their accuracy and appropriate depth of content. Though the accounts are relatively small, the small savings of many SHGs grow into valuable large accounts. Cost savings occur because, although the savings account and loan represents 20 people, only the three elected officers interact directly with the bank officers, saving time and labor of the bank. In addition, since there is internal monitoring for repayment, the bank incurs very little cost in loan appraisal and monitoring. Further, the bank’s reputation increases its social base of recognition within the village and attracts more business from other sectors.

In subsequent monthly meetings, individual members report on the progress of their various business enterprises. The members also bring their personal monthly loan payment. These payments are collected by the animators, recorded in each member’s passbook, and taken to the bank the next business day. If a member misses a payment, the SHG assesses a penalty against that member, the amount of which is added to the shared savings account. If the first round of lending is successful, the SHGs can approach the bank for a second round, with an increased credit line of 15,000 rupees ($300) per member.

ICICI’s dedication to the SHG program has a dual inspiration. The first is that ICICI believes the rural sector will be the next area of growth for India and that the SHG movement, if properly scaled and managed, makes good business sense. The bank expands its customer base and receives new deposits while reducing the cost of single transactions with the use of the animators and SHG leaders. The second aspect of the SHG program comes from ICICI’s sense of corporate social commitment to the development and enabling of the rural poor.

The indirect-channel partnership model is another approach ICICI is taking in their effort to increase distribution points and cost-effectively serve the bottom of the economic pyramid. The model looks to leverage the current infrastructure and relationships that microfinance institutions and nongovernmental organizations have in place to deliver banking services to the rural poor. By “piggybacking” on this network, ICICI does not have to implement a costly brick-and-mortar expansion model. Also, ICICI can learn from these organizations, whose sole focus is to serve this customer class, and thus minimize their own learning-curve costs.

ICICI found that giving grants and loans to microfinance institutions to spur the rural poor’s credit activities was too passive, so the bank developed a more commercial partnership role in which ICICI provides microfinance institutions with a line of credit to meet a cash flow deficit for three years. In the fourth year, the microfinance institution begins to repay the loan (and in total within the ensuing two to three years). ICICI also developed partnerships by making equity investments and creating technologies that would help penetrate the rural areas. The first steps in this indirect-channel partnership model were as follows:

Though ICICI has already made a significant impact by providing credit to the bottom of the economic pyramid, their effort is still in its nascent stages. ICICI constantly strives to cost-efficiently serve this customer class by developing innovative technologies; novel distribution models; and new initiatives, such as rain insurance, venture capital, mobile ATMs, and derivatives. One of the key challenges for the future is how to create more convenient and low-cost access points for rural customers. Most important, ICICI has made profitable inroads into serving the bottom of the economic pyramid. “Banking with the poor has undergone a paradigm shift. It is no longer viewed as a mere social obligation. It is financially viable as well.”^[17]