Now, securitised micro credit

ICICI Bank breaks new ground

ICICI Bank has started securitising micro credit.

If you thought only automobile and home loans were securitised by banks, you are mistaken. Even the smallest of small loans for buying cows and buffaloes, ploughs and handicrafts, provision stores and tea shops in remote villages can be securitised.

ICICI Bank has shown the way. The second largest commercial bank in the country, with an asset base of Rs 116,000 crore, has securitised two asset pools worth Rs 20 crore in Andhra Pradesh. At the moment, no secondary market for such securities exists.

Crisil has been appointed for rating these asset pools. The bank is hopeful of getting a triple A rating on these since non-performing assets in such loans is low, about half a percentage point.

ICICI Bank is also in talks with Grameen Bank of Bangladesh, a pioneer in micro financing, for floating a company that will provide credit guarantee to such paper. Grameen USA, a Grameen Bank trust, may hold a majority stake in the proposed non-banking finance company (NBFC).

This novel approach to micro credit has been developed by ICICI Bank's social initiative group, headed by its executive director, Nachiket Mor. The bank has tied up with 10 micro finance institutions for the project.

In the first two deals, ICICI Bank has replaced costly loans (14 per cent interest rate) provided by micro finance institutions SHARE and BASIX to over 60,000 borrowers with new, cheaper (around 8 per cent) loans. The bank has opened an escrow account where the repayments will flow.

It is a win-win situation for all the parties involved. While the micro finance institutions are able to bring down the cost of their lent resources, small borrowers get an assured fund flow.

ICICI Bank, on the other hand, is able to build rural assets without compromising on quality. Even at an interest rate of 8 per cent, the bank is able to make money as full repayment is assured.

Moreover, this exposure helps the bank in achieving the Reserve Bank of India's priority sector lending norm, which says 40 per cent of a bank's credit has to be extended to the priority sector and 18 per cent of this to the farm sector.

ICICI Bank plans to securitise at least Rs 30 crore micro loans, involving 100,000 beneficiaries, by March-end. It is also offering fresh loans worth Rs 75 crore in partnership with the 10 micro credit institutions.

These loans will be disbursed by March to 500,000 borrowers. The plan is to build a Rs 500 crore small loan portfolio by 2004-05.

Gains in small numbers

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• At the moment, no secondary market for such securities exists. Crisil has been appointed for rating these asset pools
• Grameen USA, a Grameen Bank trust, may hold a majority stake in the proposed non-banking finance company
• ICICI Bank has tied up with 10 micro-finance institutions for the project