Frugal innovations for financial inclusion

Posted by Prof. V.N. Khanna on 12 June 2010 in

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.