Opening Markets Through Strategic Partnerships: The Alliance Between ICICI Bank and Cashpor
The strategic linkage described in this case study presents an interesting demonstration of how ICICI Bank, India’s largest private bank, hopes to reach millions of low-income clients in regions where it has no physical presence by outsourcing credit processes to MFIs operating in such regions. Although ICICI outsources operations to more than 30 MFIs, Credit and Savings for the Hardcore Poor (CASHPOR), an MFI with a vision of reaching one million rural poor women in eastern Uttar Pradesh and western Bihar in Northern India (home to 37 percent of India’s poorest people), is among the largest with approximately 70,000 active clients.
Under the partnership CASHPOR acts as a service agent for the bank undertaking the loan analysis, processing, and recovery of the loans. In exchange ICICI, as per the Central Bank guidelines, approves all loans based on the recommendations of the MFI and advances funds to CASHPOR in an uninterrupted manner to facilitate the disbursement of loans, all of which are recorded on the bank’s balance sheet and in the bank’s name. Both CASHPOR and ICICI share in the credit risk.
One of the key factors in bringing about this relationship was the regulatory framework within India. By Indian regulations, 40% of each commercial bank’s lending must be made to the agricultural enterprises for export and small-scale industries sector. Also by law, an MFI cannot borrow more than eight times its net worth. MFIs therefore, are often caught in a vicious cycle of limited operations, low profitability, and loss making as they struggle to achieve financial self-sufficiency—all resulting in an inability to raise capital. Thus, the MFIs are unable to borrow the funds necessary to increase scale, and in turn, profits and capital.
Both parties view the partnership as a success. ICICI is satisfied because the portfolio exceeds ICICI’s expectations for volume and quality, contributes to ICICI’s priority sector lending quotas, and promotes a positive image of ICICI in areas where ICICI’s presence is very limited. CASHPOR also has benefited by securing a reliable, uninterrupted flow of funds, which has allowed it to achieve scale of operations while complying with regulatory requirements related to capital adequacy.
Initially the partnership faced challenges such as low levels of risk sharing, creating new procedures for loan documentation, and difficulties in facilitating the flow of funds and reporting. The ongoing challenges to the partnership include creating an exit strategy, establishing capital adequacy for CASHPOR, aligning the costs and benefits of the partnership equitably, new product development, and institutional capacity development.
This study finds the most important elements to this partnership’s success are having committed senior management, developing mutual trust through good communication, and allowing sufficient flexibility for the partnership to adapt to changing circumstances.
The partnership between CAHSPOR and ICICI presents an innovative financing model for others to consider. Not only are the two partners happy with the arrangement, but also the Partnership Model is now being replicated throughout India with ICICI and other commercial banks. As global microfinance markets deepen and grow more competitive throughout the world, the incentive to form these types of partnerships will undoubtedly increase.