ICICI shaping a business plan to solve Rural India Banking puzzle

ICICI's CEO Kamath says:

We believe that to break into the top league of global banks, ICICI will have to follow a course that few banks in the world have done -- and that is, leverage the rural economy. This is something that most banks don't do because it requires hard work. So our challenge is to invent a new business model where we can create a distribution base effectively in 600,000 villages in India, and to learn to do that at one-tenth the cost of urban India. Just to put that on a scale that someone could understand, we believe that to succeed in urban India, we need to do be able to do business at one-tenth the cost of the West. The challenge is to be able to work with partners because we believe that the branch-led model will not work in this context. For example, we might partner with a local financial institution, a micro-finance agency or a company -- someone who is already in the village for a business purpose. We might even partner with someone who is selling fertilizer or seed or tractors. How can we leverage these partnerships to do business? That question drives the need for a new business model to reach out to this market.

The biggest risk is the failure of the monsoon. Now can you lend to rural India without fixing this risk? What we did was to ask if this was an insurable risk. Could we get such insurance? The answer was yes. Could we then sell this insurance to the farmers? Again, the answer was yes. Finally, we asked if this insurance could be further reinsured outside India so that the risk was shared even more widely. Yet again, the answer was yes.

The typical approach to rural lending has been through micro-loans, and that has certainly had some degree of success. But a large-scale rural banking model where you are ultimately trying to reach a population of 600 million people has not been done. That is our challenge -- and also our opportunity.