Deepa Shivaswami could have lived like any other girl her age in a remote village in Tamil Nadu. After she dropped out of school, Deepa could have married and started a family.
Instead, she became an entrepreneur. She runs an Internet kiosk in her village, offering services like e-mail, Internet chat, tips for health and education and so on. By and by, she plans to introduce her village to financial products like mutual funds, insurance and even equity trading.
An automated teller machine that flashes the local language, Tamil, on its screen is being set up next door. In some time, the Internet kiosk and the ATM duo could well be a proxy bank for rural India.
The kiosk has been set up by ICICI Bank in partnership with network owner n-Logue Communications, which is promoted by Ashok Jhunjhunwala, a professor at the Indian Institute of Technology, Chennai.
The kiosk works on wireless in local loop technology using fibre optic cables. By mid-2004, over 10,000 such kiosks may dot Tamil Nadu and serve as a new vehicle for banking in rural India.
The number is significant. Statistically speaking, out of the total 67,897 bank branches in the country (in 2002), 32,443 or 47.7 per cent are in rural India.
The average population served by a bank branch is 15,000. If one includes the rural cooperative banks, the average could be lower still -- 12,800. The numbers compare favourably with Indonesia and Mexico.
However, numbers do not tell the truth. Fifty-eight per cent of the rural households do not have a bank account and only 21 per cent have access to credit from a formal source. Over 70 per cent of marginal farmers have no deposit account and 87 per cent have no formal credit.
Only a little over 1 per cent of rural households can rely on a loan from a financial intermediary to finance unforeseen expenses. Approval for such loans takes between 24 and 33 weeks. Often, consumers need to bribe officials to get loans, with the bribe varying between 10 and 20 per cent of the loan amount.
In 2002, the number of rural deposits was 30.2 per cent of the total deposits in the banking system (Rs 13.30 crore out of Rs 43.99 crore). However, the amount of deposits mopped up in rural India is only 14 per cent of the total deposit liability of the system (Rs 1,59,423 crore of Rs 11,23,393 crore).
Similarly, there are 2.51 crore rural advance accounts, which is 44.5 per cent of the total number of advance accounts. However, the share of rural pockets in the total credit kitty is only 14 per cent (Rs 92,789 crore of Rs 6,55,993 crore). Overall, 18 per cent of the rural population has bank accounts. The comparative figure in urban India is 103 per cent.
It is clear that the supply of formal finance is biased against the rural population. The per capita deposit in rural areas stood at Rs 2,150 or around 10 per cent of the national per capita income in 2001.
In contrast, in urban India, it is Rs 33,780 or around 160 per cent of per capita GDP. Credit per person in rural India is Rs 900 or around 4 per cent of national per capita GDP compared to Rs 20,600 for urban centres, which is 100 per cent of national per capita GDP.
The number of credit accounts in rural areas relative to the total rural population is only 3.4 per cent against around 10 per cent in urban areas.
Modelled on ITC's e-choupal initiative, the Internet kiosk run by Deepa can play an important role in bringing banking to the rural population. E-choupal -- equipped with a computer and Internet connectivity -- was conceived to tackle the challenges posed by the agriculture sector, such as fragmented farms, a weak infrastructure and the presence of numerous intermediaries.
Although the objective of e-choupal is to bring efficiency to ITC's procurement process, an important byproduct is the increased empowerment of rural farmers.
ICICI Bank's Internet kiosk scheme can mean financial empowerment for rural people. In a way, it can be described as a backdoor entry into banking.
But, given the circumstances, this is a welcome initiative, if we want to reduce rural India's dependence on non-formal financial sources like local money lenders, chit funds, bishis and so on. A 1997 PricewaterhouseCoopers study said that the dependence of low-income households on informal sources is as high as 78 per cent.
Branch banking in rural India is a loss-making proposition and existing regulations prevent the entry of agents mobilising deposits or selling loans.
In this context, the combination of the Internet kiosk and a local language ATM can revolutionise the landscape of rural banking without violating the letter of the law. They can do what 196 regional rural banks and four local area banks have been unable to achieve.
At a parallel level, the rural population can be reached out to through non-government organisations and micro-finance institutions. ICICI Bank is using this route by developing two products -- buying out existing portfolios of the MFIs and offering loans through a partnership model.
The bank has securitised two asset pools of small loans worth Rs 20 crore in Andhra Pradesh. Crisil will undertake a rating exercise for the pool of assets. It hopes to score a triple-A for these pools as the non-performing asset level is extremely low in such loans -- about half a percentage point.
Demonstrating its seriousness about the entire exercise, ICICI Bank has initiated talks with the Grameen Bank of Bangladesh, a pioneer in micro-financing, to float a company for giving credit guarantee to such papers. Grameen USA, a trust of the Grameen Bank, is slated to hold a majority stake in the proposed non-banking finance company.
Under the arrangement, ICICI Bank has replaced the MFIs' existing high cost loans (bearing an interest rate of 14 per cent) to over-60,000 borrowers, by low cost (around 8 per cent) new loans. To ensure repayment, ICICI Bank has opened an escrow account where all repayments by the small borrowers will flow. So far, the bank has tied up with 10 MFIs and several more are on the cards.
It's a win-win situation for all parties involved. The MFIs are drastically bringing down the cost of their resources that are on lent to small borrowers. The small borrowers are assured of flow of funds and ICICI Bank is building rural assets without compromising on its quality. Even at 8 per cent, the bank is able to make money because full repayment is assured.
Moreover, this exposure also helps the bank achieve the Reserve Bank of India's norm of priority sector lendings that stipulates that 40 per cent of loans should be lent to priority sector and 18 per cent of this to the agricultural sector.
ICICI Bank Executive Director Nachiket Mor, who also heads the bank's social initiative group, is passionate about the project. "This is just the beginning. We have rolled out only two products in four states -- Tamil Nadu, Andhra Pradesh, Orissa and Uttar Pradesh.
In four months, between December 2003 and March 2004, we plan to reach out to five lakh beneficiaries. By fiscal year 2005, we will build an asset base of at least Rs 500 crore (Rs 5 billion)," he says.
It may sound optimistic but the target is achievable as the second product, based on a partnership model, is working well. The estimated demand for micro financing in India varies between Rs 15,000 crore (Rs 150 billion) and Rs 45,000 crore (Rs 450 billion).
The partnership model has been designed to leverage the comparative advantages of the bank on the one hand, and the MFI on the other. Under this model, the MFI sources loans directly in the books of ICICI Bank and continues to monitor and recover loans thus disbursed.
This releases the capital constraint for the MFIs and permits rapid increases in reach. The MFI then becomes an originator and servicer of micro loans on an ongoing basis.
What makes ICICI Bank's attempt unique in introducing financial products to the rural poor is its packaging. Small loans of Rs 20,000 for buying buffaloes or for setting up a tea shop are offered with life, non-life and even weather insurance.
The last one, a relatively new product in India, can eventually replace the government's age-old crop insurance policy, which takes long to settle claims and is expensive both for the government as well as the beneficiaries.
Weather insurance products provide cover against deviation from the normal expected rainfall, wind speed or other weather phenomenon, and not just against drought and flood.
The pilot programme of India's first rainfall insurance programme was conducted in July 2003, in Mahabubnagar, Andhra Pradesh, when a local area bank bought a bulk insurance policy from ICICI Lombard, the bank's general insurance arm, and sold around 200 individual policies for groundnut and castor farmers. Since then, the cover has been extended to 50 soya farmers in Madhya Pradesh and 600 acres of paddy crop in Aligarh in Uttar Pradesh.
The message is quite clear. An innovative approach to rural lending can do what the government's continuous pressure on the banking system for expanding the base of kisan credit cards and good old guidelines for agricultural lending cannot.