Mahindra War Room 2019 Design to Disrupt

“PHYSICAL, DIGITAL OR PHYGITAL?”

LIVE BUSINESS CHALLENGE FROM FINANCIAL SERVICES

“Disruptive innovation can hurt, if you are not the one disrupting.”

Chapter 1: Empathize

The year was 1991. India was heading towards an economic situation popularly
called the ‘Balance of Payments’ crisis. A high trade deficit, coupled with a high
fiscal deficit compounded by the Gulf War meant India had foreign exchange
reserves that could finance just 3 weeks worth of imports, while the government
came close to defaulting on its financial obligations. While the Rupee devalued
sharply, Moody’s downgraded India and the IMF & World Bank stopped financial
assistance, pushing India to the brink. The Government was left with no choice
but to drastically open up the Indian economy to global competition. Decades of
socialism driven practices that limited the growth of industry were
comprehensively dismantled in just weeks. It seemed as if nobody really knew
what might happen, but these policy changes just had to be made in a crisis
mode. These measures expectedly started setting off profound changes in the
economic conditions across India. For over 4 decades then, Mahindra had
successfully sold Jeeps and Tractors, which were very popular across Semi-
urban and Rural India.

Chapter 2: Design & Ideate

Foreseeing the far reaching consequences of the economic reforms, Mahindra

Finance was set up with “2 people and a desk” in Mumbai in 1995. Across the
world, a major factor in the purchase of vehicles - whether for automotive use or
farm - is the availability of easy credit. Purchase of vehicles around the world is
largely funded by credit, as the creditor can always repossess and resell the
asset, in the eventuality of non-payment of dues by the debtor. The risk
associated with vehicular financing is thus mitigated, compared to other
unsecured loans such as a personal loan where the consumption need not result
in the creation of an asset. In old India, credit was strictly regulated and it was not
easy to avail of a loan, particularly for the poorer segments of society. But this
changed drastically after liberalization, when non-banking finance companies
started growing rapidly. Customers of utility vehicles and tractors usually financed

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their purchase through dealers or their nationalized bank associates, often at a

high cost of interest and costly entry and exit barriers to execute the transaction.
It was not easy for a new entrant - even one as well entrenched as Mahindra - to
break through this coterie and finance the transaction. “How to design a value
proposition which competed effectively with the numerous local choices, but still
would make sense for a large brand like Mahindra?” This was the challenge in
1995 occupying the mind of Mr. Ramesh Iyer, the 36-year old newly appointed
GM Operations, one of the 2 people in the proverbial desk.

Chapter 3: Prototype & Test

Mr. Iyer initially approached Mahindra dealers and offered easy financing
schemes for their needs. “I have my own finance company, why should I finance
from you” was the common refrain of these dealers, who themselves were
lending to locals in the district. They often charged higher rate of interests, but
made credit more easily available compared to their nationalized bank peers.
Also, they knew the local market better and were more nimble in converting
prospects. Mr. Iyer was faced with a strategic dilemma - should he design
products that focus on wholesale financing and try to sell B2B, or should he
design products targeting the retail customer and sell B2C? While it would be
easier to sell B2B, retail finance would be much more difficult, given the need to
compete with numerous regional players. As Robert Frost said, “Two roads
diverged in a wood. I took the one less traveled and that made all the difference.”
Mr. Iyer made the difficult strategic choice to focus on retail-finance (direct to
customers), rather than wholesale-finance to dealers.

This strategic choice had profound implications in product design, organization

design and even office design! A retail finance company is only as good as its
recovery. With no prior experience in the retail finance market, how would
Mahindra be able to ensure strong recovery success? For this, Mahindra
designed processes that blended the local intelligence (as a regional finance
company would), with the trust and scale benefits of the reputed Mahindra brand.
To make this happen, Mahindra, like their regional competitors, primarily hired
local talent to run the branches, and relied on the branch manager’s judgement
as an important tool to make financing decisions. The first branch of Mahindra
Finance offering Auto and Tractor loans was thus opened in Jaipur in 1995.

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Chapter 4: Scale Profitably

The Jaipur branch started breaking even much earlier than imagined, leading to
a domino effect. Mahindra Finance started adding 1 branch a month on average,
all the way to 900 branches across the country over a decade.

While emulating the nimbleness and local intelligence of regional Financial

Services players, Mahindra Finance also saw the large opportunity in “financial
inclusion” well ahead of its time. Mahindra championed the “earn and pay”
model, focusing on providing loans for income generation, rather than
consumption. Before the term “bottom of the pyramid” became popular, Mahindra
was creating highly focused products for that segment, creating a large
community of happy customers from people who were completely left out by the
traditional banking system. Purchase of products such as tractors, farm
equipments, haulage appliances, transportation vehicles etc. were supported,
rather than loans for wedding or general spending. Furthermore, Mahindra
customized financial products such as asset financing, fixed deposits, mutual
funds, SME financing, rural housing finance, life insurance and non-life insurance
broking services, to the peculiar requirements of rural customers, whose needs
were vastly different from the urban customers in India. The classic example is of
the home loan, where Mahindra Finance offered smaller lots to build specific
parts of the home such as a compound wall, one room, roof and so on in
separate disbursements - a series of a “micro-loans”. Through these
differentiators, Mahindra Finance built lasting relationships of trust with
customers, reposing high faith in their customer’s ability to repay loans on time -
which eventually became a self-fulfilling prophecy. The good balance between
aggression and conservatism in lending practices was so successful that that
Mahindra Finance never shut a branch once opened.

Chapter 5: Design to Disrupt

Now nearing the 25th year in business, Mahindra Finance is an INR. 70,000
crore enterprise serving 6 million customers spread across all major cities and
250,000 villages in India. Going public in 2006, Mahindra Finance also set up
subsidiaries focused on insurance, broking, housing finance, asset management
and Farm equipment financing company in the United States.

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Few companies enjoy the penetration, reach, credibility and insights that
Mahindra Finance has in Rural India. And this Rural India is going through a
tectonic shift. The age of the typical Indian farmer is falling - far from the
stereotypical 50-year old, we now have a 25-year old - a more risk-taking
individual who is driven to seize opportunities, wants more cash flow streams and
has a lower inhibition to borrow. Farmers today have multiple sources of revenue,
and many of these earnings are falling back into the bank, thanks to the Jan
Dhan Yojana campaign. The World Bank Global Findex reports that of the 51.4
crore bank accounts opened in 2014-17 globally, a whopping 55% were from
Rural India. With many rural Indians coming into the traditional banking system,
the paradigm is shifting to“authentic credit” from “judgement-driven credit”.
Beyond the farmer, typical Indian Rural economic roles include traders, priests,
contractors, teachers, doctors and lawyers among others, also constitute
Mahindra Finance’s customers. While each of them have unique cash flow
cycles, the one thing common to all these segments is their digital literacy, The
wide availability of low-cost smartphones and cheap internet data has digitally
enabled rural India. This expanding digital footprint is exposing the rural
customer to urban practices and lifestyles, driving aspirations.

Thus far, Mahindra has predominantly been in semi-urban and rural markets in
physical format with branches. With this model, Mahindra Finance has built a
base of 6 million customers and 3 million guarantors. But given this paradigm
shift driven by digital, will this model remain the same, or will it be disrupted
by purely digital or hybrid physical + digital (phygital) models? Given the
consumer’s demographic, psychographic and aspiration profiles changing
rapidly, will the disruption be consumer driven? Or would any of the current
strong competitors in Financial Services without a significant physical presence
(such as Bajaj Finance) be the disruptive force?

How should Mahindra Finance respond to this transformation of their core

customer base? Which way should they go - physical, digital or phygital? How
can Mahindra Finance transform vehicle financing using digital? How can more
products - particularly in promising areas such as insurance, personal loans or
small ticket loans - be delivered to a large customer base through the power of
digital? How can Mahindra use their large data set to create afforded rural-

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focused financial service solutions delivered on time? How can the housing
business be grown beyond the current rural housing space, in upcoming areas
such as affordable housing? How can the asset management business be scaled
up to be the future large business for Mahindra Finance? Mahindra today has a
large community of suppliers, dealers and other vendors, most of whom are
small and medium enterprises. How can Mahindra Finance harness these
relationships and understanding of SMEs? What are all various financial needs of
a consumer, and which of them can be fulfilled by using available data and digital
delivery of the solution?

With the typical family size being 4, Mahindra Finance has over 40 million
authentic data points tracked over 3 or 5 years of customer engagement, with
deep insights into their earning potential, track record and consumption patterns.
This, with a large balance sheet and multiple financial services products, puts
Mahindra Finance in a uniquely advantageous position to use design and digitally
disrupt financial services, particularly in Rural India. What should be the new
Data-driven, Digital face of Mahindra Finance? If digital and data are going to
guide the future of business, how should Mahindra finance redesign itself in all its
businesses, while tapping new opportunities like insurance? How should
Mahindra Finance invest digitally and what should be the new approach?

Using Data, Domain Knowledge, Digital, Design and Delivery as key pillars,
evolve the new disruptive Mahindra Finance of the future starting today.

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