Following the phenomenal success of the Unified Payments Interface (UPI) mobile payments platform, India is embarking on the next step of digitising its financial services sector. The possibilities are limitless, but so are the challenges.
An increasing NPA burden has hampered most Indian lenders, and the emphasis has shifted to the underserved SME and micro-lending segments. However, lenders have been unable to realise their full potential due to a lack of access to real-time credit data.
The Emergence of the Open Credit Enablement Network (OCEN)
The MSME credit gap is expected to be between $270B and $330B. Furthermore, the cost of financing is too high for small-value loans to be feasible, keeping most small and medium-sized firms out of the picture.
To solve this issue, the Open Credit Enablement Network (OCEN) programme is developing a common credit information platform to connect lenders, customers, and merchants.
- O: Open – A credit scheme that is open to anyone.
- CE: Credit Enablement – The provision of credit to the underserved MSME sector.
- N: Network – A network of lenders, account aggregators, and borrowers who will take advantage of the bandwagon effect.
How Does the OCEN Ecosystem Expand Our Financial Landscape?
Addressing asset quality issues
Simply defined, OCEN is the lending equivalent of UPI for mobile payments. It is an open protocol that will allow for the smooth flow of financial information at the point of purchase to financial institutions via dedicated data aggregators, with the customer granting real-time consent.
This, in turn, will assist lenders in closing the loan origination gap, with customers receiving the best available bids. OCEN will operate on a secure digital platform that meets the stringent data protection criteria of the Personal Data Protection Bill, which was introduced in Parliament in 2019.
The technological foundation has been established. OCEN is the most recent version of the India Stack, a platform that has enabled innovations like Aadhar/UID, DigiLocker, and UPI. Lenders will now be able to obtain client credit information via Account Aggregators, a new category of NBFCs that will act as credit data gatekeepers. Account Aggregators (AAs) will then source the data from a centralised public credit database that will combine traditional and non-traditional credit data sources.
OCEN will allow banks to closely monitor borrowers’ spending habits and take early corrective action if there are symptoms of financial difficulty. In collaboration with aggregators and lenders, merchants will serve as frontline loan service providers.
For the first time, lenders will be able to use data linked to consumer spending behaviour, such as utility payments and tax information, for loan underwriting purposes. Credit bureaus currently do not include such data in their reports. This will most likely increase lenders’ capacity to visualise risk and asset quality over time.
Consumer financial information is being democratised on a large scale
The coronavirus epidemic has caused an all-time low in economic growth. Demand for retail and corporate borrowing has already slowed, and lenders are looking for measures to keep credit costs under control.
Credit data collection and, more critically, market information will become much more automated for lenders with OCEN. It will result in the democratisation of credit data access throughout the loan value chain. This will assist lenders in forecasting macroeconomic market developments and developing targeted products to satisfy emerging demand.
The lending business works in a highly regulated environment. According to estimates, the impending Personal Data Protection Bill has penalties ranging from INR 5 crore to 15 crores for minor and significant regulatory infractions.
This raises the stakes for banks and private lenders, who are already battling to stay competitive in a volatile business environment. Lending organisations will be able to be proactive in their approach to compliance and risk management by utilising standardised credit data.
Because of OCEN’s open API, lenders can build smooth data pipelines with merchants or loan service providers, reducing turnaround times. This, in turn, will contribute directly to an improved client experience. From loan origination to account servicing, lenders can now anticipate cost savings that would not have been feasible with old processes.
Filling existing gaps
OCEN will serve as the ideal test case for a slew of comparable frameworks in fields as diverse as insurance, education, and skill development. Countries like Brazil are already keeping a close eye on its real-world consequences.
The convergence of e-KYC, online documentation, and quick credit verification through the multiple layers of India Stack will enable better economies of scale, better resource utilisation, and higher profits for Indian lenders.
Lenders cannot thrive in the open banking era unless they embrace a customer-centric business model. With loan markets making product discovery faster, several large banks have taken the lead in leveraging data analytics to distribute pre-approved loans in under a minute.
The majority of lenders would be able to approve such loans in near real-time using OCEN while maintaining total compliance with credit criteria. OCEN could level the playing field for smaller NBFCs in terms of exploring new market opportunities, notably in the Micro, Small, and Medium Enterprise (MSME) segment.
The only need for using the new protocol is a compliant loan management system that can communicate with the OCEN API.
Conclusion
In the fields of Fintech and data analytics, India is an industry leader. Despite this, the great majority of Indians are credit-deprived and must rely on informal credit sources. The business options available range from the farm industry to small traders.
Implementing OCEN is likely to result in improved interaction between lenders and marketplaces. However, as the number of lending channels grows tremendously, lenders will need to accept change and efficiently leverage partnerships in order to innovate and expand.
Pirimid Fintech is an empanelled TSP for OCEN Ecosystem. It provides OCEN Gateways to Lenders and LSPs to be part of the ecosystem. Go live on the OCEN ecosystem with Pirimid’s OCEN Gateways.