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Financial inclusivity is driving economies in 2021. Governments and private entities are innovating to usher in technologies that can make digital financial services accessible and affordable for all Indians. OCEN is considered to be the next major disruption, after UPI, in this leap towards financial inclusion. However, its launch has not only raised hopes but has also provoked thoughts on its ability to fill the ever-widening credit gap.
OCEN offers frameworks and protocols to make the lending process more democratic. In India, when it comes to credit flow, historically small businesses have been the most distanced. They also form a major part of the country’s economy. However, financial institutions have been grappling with this large segment for years considering the distribution cost.
Over the last few decades, the Micro, Small, and Medium Enterprises (MSMEs) sector has emerged as a highly vibrant and dynamic sector of the Indian economy. Around 63 million MSMEs are contributing nearly 30% of the country’s GDP. It employs approximately 111 million people. MSMEs not only play a crucial role in providing large employment opportunities at comparatively lower capital costs than large industries but also help in industrialisation of rural and backward areas.
MSME credit gap is estimated to be approximately INR 882 trillion, of which debt requirement is INR 69 trillion. The formal credit accounts for only 16% of the estimated demand, leaving an unmet demand of INR 58 trillion. MSMEs’ limited availability of credit history and lack of matured financial accounting systems have historically hampered attempts to meet this credit gap.
MSMEs have a specific set of needs such as smaller loans, shorter repayment spans, and most importantly, hassle-free and instant access to funds. These requirements have been not feasible for financial institutions, making them focus on bigger business entities. According to a recent report by the Association of Chartered Certified Accountants, nearly 80% of MSMEs lack access to formal credit.
MSMEs have huge potential to generate employment and pave the way for inclusive economic growth. However, the lack of accessibility to credit has slowed their growth trajectory. For MSMEs, the massive credit gap and the need for human intervention at every stage of the transaction are making it unfavourable for smaller loans for shorter repayment tenures. However, the launch of OCEN has been heralded as a great antidote for the current scenario.
The shift towards digital India’s credit lending infrastructure can now benefit from the increased availability of data at the consumer level. UPI and GST have created new data layers that were previously unavailable for lenders for instant access.
Government of India’s efforts to digitise the Indian economy has led to the development of IndiaStack. IndiaStack is the largest open API in the world, and it has brought a paradigm shift in India’s Fintech market. Starting from the world renowned Aadhaar project, IndiaStack has offered open APIs such as eKYC, UPI, eSign, etc. Its latest accomplishment is the OCEN.
OCEN, launched in July 2020, is an open protocol infrastructure that enables consent-based access to verified data points from multiple public and private data sources. It provides a standard set of APIs for various stages of a typical lending value chain allowing marketplaces, aggregators etc. to plug in lending into their current operations.
OCEN as an idea aims to create a standardised layer on existing loan management systems, opening it up to the markets and encouraging more people to participate in this digital credit ecosystem. UPI has been a successful endeavour and it has been working on top of traditional banking structures. As of now, OCEN is in its nascent stage, and since it is published and is an open source, financial institutions around the world can implement it. It is essentially enabling a modern digital acquisition channel.
According to experts, OCEN will enable financial institutions to deliver products to their customers in an efficient manner. It can help them in offering small high-value loans in real-time. Also, digital payment transactions history can be used as a determinant for loans to small businesses. Moreover, account aggregators can streamline their credit offerings via applications.
After a brief slowdown over the COVID-19 pandemic, according to the ACI Worldwide report, India’s payment ecosystem has undergone a revival. The number of UPI transactions was recorded at 2.3 billion as of January 2021. This is almost 1 billion higher than February 2020. In light of the high volume of digital transactions, there is certainly scope for OCEN to be a crucial component of the digital ecosystem.
OCEN addresses problems faced by both lenders and customers in traditional lending. It enables Lenders to have access to the continuous flow of data, which allows them to build customised products and have a cushion against the risk of lending to MSMEs. It gives customers quick access to collateral-free funds.
OCEN currently has the potential to solve formal credit issues of only those customers who are already in the digital ecosystem but not of those who still exist in data dark areas. For OCEN to be successful and make a visible change in the credit gap issue, the entire ecosystem of lending needs a revival. It is important to improve the digital adoption rate of customers. Enabling incentives to adopt digital and matured accounting models will help. Lenders should also adopt a data-driven approach for underwriting a customer and offer customised products.
Given the existing landscape of MSMEs, a quick turnaround in the lending business might not be possible, but with the changes in the ecosystem, OCEN has the potential to disrupt the way credit is accessed in India.
The article was published on ET BFSI.com.