Page 202 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 12: Capital Adequacy

the people below poverty line. It provided basic banking services like savings and Notes
withdrawal along with micro-investment products like mutual funds.

This provided poor people with safer avenues for saving with little volatility. ICICI Bank
was also instrumental in designing new structures through which Microfinance Institutions
(MFIs) and Non-governmental Organizations (NGOs) could overcome capital constraints
and expand their reach.
The structures included buying the microfinance portfolios of MFIs either on a selective
basis or buying the complete loans of a branch or a particular area, and also entering into
partnership arrangements with MFIs. This helped in leveraging the operational strength
of NGO/MFI with the financial strength of ICICI Bank. In the world’s largest securitization
deal, ICICI Bank purchased a portfolio of 42500 loans worth US$ 4.3 million from Share
Microfin Limited in 2004.
Background Note
In March 2004, the cumulative disbursements to SHGs stood at ` 39 billion. According to
industry experts, the demand for microfinance in India was estimated at about ` 300
billion. This meant there was a huge unmet gap between demand and supply.

In the past, high demand and low supply of micro-credit was blamed on the limited efforts
of major Indian financial institutions to reach the poor. Banks considered small loans as a
statutory obligation rather than a business opportunity. Mainstream financial institutions
considered these loans as ones that were difficult to recover, unprofitable and involving
high transaction costs.
These loans were perceived to carry high risk as they had high default rates; the borrowers
usually did not have any viable income generating opportunities nor did they possess any
collateral guarantee.
To fill the huge gap between demand and supply, an environment that was conducive for
microfinance providers was required. ICICI Bank was promoted in the year 1994 as the
banking division of Industrial Credit and Investment Corporation of India Limited (ICICI).
ICICI was a developmental financial institution incorporated in the year 1955, as a joint
initiative of Government of India, the World Bank and representatives of the Indian
industry.
By the 1990s, ICICI had emerged as a diversified financial group that offered a wide range
of financial products through a network of subsidiaries and affiliates. In April 2002, ICICI
merged with ICICI Bank.
Bank Led Model
The bank led model was derived from the SHG-Bank linkage program of NABARD.
Through this program, banks financed Self Help Groups (SHGs) which had been promoted
by NGOs and government agencies.

ICICI Bank drew up aggressive plans to penetrate rural areas through its SHG program.
However, rather than spending time in developing rural infrastructure of its own, in 2000,
ICICI Bank announced merger of Bank of Madura (BoM), which had significant presence
in the rural areas of South India, especially Tamil Nadu, with a customer base of 1.2
million and 77 branches.
Bank of Madura’s SHG development program was initiated in 1995. Through this program,
it had formed, trained and initiated small groups of women to undertake financial activities

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