Meet Rajni, a roadside food vendor, living in the heart of rural India. Every day, under a thatched roof, she prepares and sells her famous Kulchas to the local community.
However, to purchase the daily vegetables and cooking materials, Rajni has to borrow money from a local lender everyday at high interest rates.
With OCEN in place, ( hopefully should happen soon ), lets understand how Rajni’s and hers families life improves / changes –
- Rajni needs a loan of Rs. 500 > Goes to a credit marketplace > Aadhar makes it possible to authenticate identity
- Agrees to share relevant data: Account statement, Credit History, GST data etc..
Uses electronic Data Consent, Account Aggregator and Public Credit Registry stores and shares that data
- Sees many options for loans via the Credit market place. Further, APIs make it possible for them to connect with financial institutions
- Accepts an offer, Signs the contract digitally via eSign, Digilocker
Sanction in 30 seconds and immediate disbursement
- Receives the loan through account which is UPI enabled thus cuts down on the total 2% margins of debit card transactions
- Sells food and collects money to UPI enabled account
- Repays Loan via Collections app which is Bharat Bill Payment System (BBPS) enabled
This entire process can happen in one single day
The MSME Gap
India is home to approximately 56 million MSMEs, employing around 110 million individuals and contributing significantly to the nation’s economy. These enterprises account for 31% of the GDP and 45% of total exports. Among them, approximately 53 million are micro MSMEs with investments below INR 1 crore. (International Financial Corporation, 2018)
Undoubtedly, MSMEs play a vital role in shaping India’s economic landscape.
However, only 14% of MSMEs in India have access to credit, a figure significantly lower than the 30% observed in developed countries. In 2022, the credit gap was estimated to be USD 540 billion. (Avendus MSME Lending Report,2023)
The primary reason behind this disparity is that these entrepreneurs often require small amounts of money for short durations.
Causes
The high costs associated with
- Customer acquisition,
- Underwriting (the process by which the lender decides whether an applicant is creditworthy and should receive a loan), and
- Servicing (the process of collecting payments on a loan and passing along distributions to the parties involved)
Have deterred formal financial institutions from providing the much-needed credit.
Consequently, these individuals have been forced to rely on informal credit sources that impose very high interest rates.
Bank loan application processes take a lot of time and do not guarantee approval. Banks also offer only prefixed products.
MSMEs have specific requirements in loans, such as
- Turn around time
- Reliability, and
- Flexibility
Which are difficult to fulfill within the formal credit sector.
The problem persisted because the existing credit processes relied heavily on manual and physical procedures, which resulted in increased costs and made them impractical for lenders to implement effectively.
The Turn — Key Solution
OCEN (Open Credit Enablement Network), is a credit protocol structure akin to UPI (Unified Payments Interface). It is designed to facilitate collaboration between selling apps and lenders.
Serving as a standardized middle layer, OCEN encompasses a well-defined set of APIs (Application Programming Interface) that streamline interactions between digital platforms and lenders. By seamlessly integrating with multiple lenders, digital platforms can now digitize the entire lending life cycle and offer credit on their platforms.
What makes it possible?
The India Stack allows OCEN to complete transactions that are
- Consent based
- Cashless
- Paperless and
- Presence — less
In a fast and secure way.
The introduction of OCEN empowers lenders to open their financial infrastructure to a diverse range of digital platforms, enabling them to tap into new pools of borrowers. This transformative network allows for the provision of “sachet-sized” loans (small loans) for short durations, catering precisely to the needs of MSMEs.
What sets OCEN apart is its” innovative credit decision model, which primarily relies on invoices and cash flow data from the platform itself, rather than solely relying on balance sheets or financial statements”.
This model makes the process faster and cheaper
Customer Journey
The flow of transactions in OCEN will look like illustrated below :
Way Forward
By providing a simplified integration process for new solutions, OCEN promotes healthy competition and enables a wider range of credit offerings that cater to the unique needs of customers.
Currently, OCEN is undergoing a pilot phase on the GeM Sahay app, which is the Government e-marketplace. Through this pilot, participants have been able to access credit starting from as low as Rs160 against their purchase orders.
Although OCEN still has some way to go before it becomes accessible to individuals, the existing infrastructure lays a strong foundation for further innovation.
It opens doors for innovators to build upon the existing framework and turn the dreams of people like Rajni into reality.
Author:
Jacob Jose with insights from Brijesh Damodaran
