The Economic Times, Last Updated: May 31, 2010
For inclusive growth in India, private enterprises should innovate to develop customised and cost-effective products and services for under-penetrated markets. The hallmark of such innovations is our completely homegrown Tata Nano, which Bruce Nussbaum suggested contains two salient forms of innovations, ‘frugal engineering’ and ‘inclusive innovation’ and christened it as frugal innovation or Nanovation.
Frugal innovation is a whole new management philosophy, which integrates specific needs of the bottom of the pyramid markets as a starting point and works backward to develop appropriate solutions which may be significantly different from existing solutions designed to address needs of upmarket segments. We Indians are natural leaders in frugal innovations, with our ‘jugaad system’ of developing make-shift but workable solutions from limited resources. GE MAC 400, a hand-held ECG device, Mahindra Geo, a low-cost fuel-efficient minitruck , Godrej Chottukool, battery powered refrigerator and Tata Swachh, water purifier, are examples.
The concept can be successfully extended to the services sector to tackle ‘financial exclusion’ . Despite having amongst the world’s largest network of about 79,000 banking outlets, we still have just 15 crore saving bank accounts for a population of 118 crore. Access to a saving bank account is the very basic (but sufficient) indicator of financial inclusion.
The first major breakthrough in financial inclusion came through when MYRADA, an NGO working in Karnataka developed the self-help group (SHG) methodology to link the unbanked rural population to the formal financial system through the local bank branches. Thanks to the efforts of the Reserve Bank of India (RBI), Nabard, state governments and numerous civil society organisations , about 8.6 crore households now have access to banking through SHGs. There are 61 lakh saving-linked SHGs with Rs 5,545.6 crore aggregate savings and 42 lakh credit-linked SHGs with loan outstanding of Rs 22,679.8 crore as on March 31, 2009 (see the accompanying chart).
Equitas, a Chennai-based new generation microfinance institution has adopted high-end software solutions and centralised operations system used by mainstream retail banks which require a higher initial capital outlay but offer significant operational cost reduction . Clearly, frugal innovation does not necessarily mean a low capital-cost innovation but definitely a low overallcost innovation. Equitas has developed a proprietary system of pre-coded receipt stickers for repayment collections as against ‘hand-held device’ thereby reducing capital costs and eliminating service issues related to decentralised use of such devices. In addition, the collections are tracked at the central office on real time basis through SMS reports sent by field workers.
This system enables the top management to supervise about one lakh micro transactions conducted by over 2,000 field staff on a daily basis. Though the backend ‘brain’ of Equitas is more like a tech-savvy bank, the front-facing customer interface is akin to a development organisation. The MFI goes beyond leveraging technology to build a merely transactional relation with it clients to offer customised solutions that help enhance its relevance in a customer’s life. For instance, realising that illhealth of family members is the most common cause of non-voluntary defaults in its customer segment, Equitas has launched health helpline with a network of 54 hospitals.
The business correspondent (BC) model advocated by the RBI is another pertinent example of potential frugal innovation in the financial inclusion space. The use of BCs enables banks to extend banking services to the hinterland without setting up a brick and-mortar branch, which is often an unviable proposition. Banks use various types of hand-held devices, (aptly nicknamed micro ATMs) to authenticate micro-transactions at the BC location and to integrate the same with bank’s main database.
A working group constituted by the RBI for developing common open standards for such devices has suggested the possibility of nationwide networking of such micro-transaction devices based on the common authentication system that will be provided by the Unique Identification Authority of India (UIDAI). When put in practice, this will become yet another hallmark of frugal innovation as the world’s biggest ATM network developed at fractional costs as compared to the conventional ATM network.
The biggest challenge in financial inclusion is how to reduce the transaction cost of micro-transactions such as authentication and cash handling. The best way to address this challenge is by riding piggy-back on some existing technical and commercial infrastructure. One commercial bank’s mobile money service uses various BC outlets as convenient points for converting physical currency into digital currency (and vice versa) which is stored on the customer’s mobile phone in a secure manner. The customer can use this digital currency for various types of payments and even for remittances to family and friends in a self-authenticated manner through a mobile network.
This initiative, developed in technical collaboration with Nokia and Obopay , is in its pilot stage at Pune, but it is potentially the most convenient, low cost , secure and instant fund transfer proposition for our country. This will also augment financial inclusion amongst the unbanked and under-banked segments by bringing financial services to the consumer’s mobile device. Given that we are adding almost one crore new mobile connections per month to our 43-crore strong subscriber base, this kind of a scheme seems the most appropriate way to reach out to these unbanked and underbanked segments.
In sum, from processes, procedures, technologies and even human intervention, frugal innovations can be extended to every aspect of banking to deliver a holistic range of financial services to the bottom of the pyramid in a cost-effective and efficient manner.
-By Rana Kapoor MD and CEO of Yes Bank