There is no denying the fact that India is starved of formal, affordable credit. The traditional credit flow is inefficient for decades. A multitude of reasons such as collateral baggage, small-sized credit requirements, high credibility, and more have hampered sectors like MSMEs to attain credit from financial institutions. They either fail to disburse credit or end up charging a high cost of capital.
If we put this into figures, “There exists an expected customer base of nearly 300 million Indians who have not been tapped by the formal credit lenders, the banks, and the NBFCs.”
However, the approach of India’s MSME financing is expected to change for the better with the launch of a new credit protocol infrastructure, ‘Open Credit Enablement Network (OCEN), built and developed by iSPIRT. It is introduced to mend this wide credit gap and channel loans to underserved communities through innovative financial solutions.
Let’s dive deep into what OCEN is and why it is a buzzword rolling around the digital lending ecosystem.
OCEN: The Next Disruptive Innovation of the Indian Lending Landscape
Open Credit Enablement Network, OCEN is an open protocol infrastructure that will act as a link between Loan Service Providers (FinTechs, e-commerce giants) and financial companies (NBFCs, banks). It is built over a framework between the three participants including Loan Service Providers (LSPs), Technology Service Providers (TSPs), and lenders.
This protocol is to credit the same as UPI is to pay and what account aggregator is for data. It is a standard protocol that simplifies the loan application process. It aims that any service provider that interacts with consumers and MSMEs can become a Fintech-enabled credit marketplace or a loan service provider (LSP).
By democratizing access to credit, it is addressing several pain points of the Indian lending industry such as reducing the cost of acquiring new customers, cutting off loan deposit turnaround duration, lowering interest rates, simplifying credit needs, and more.
Sahay app is known to be the first launch use case of OCEN that facilitates invoice financing for SMEs unpaid invoices.
Use Cases of OCEN
OCEN primarily aims at enabling a digitized credit infrastructure. Companies about to integrate OCEN APIs include Kirana tech apps, invoicing apps, existing fintech companies, and more.
Let’s unleash the high-yielding potential of OCEN by considering the mentioned use cases.
Seamless Lending/ Easy Access to Capital
OCEN strives functionally to standardize the loan application process, making it swift, hassle-free at the end of both parties. By integrating OCEN API, MSME business owners can access:
– An extensive pool of small, high ticket loans through an innovative marketplace
– Customized credit solutions
– Minimized operational costs as things go digitally
– Well-managed data asymmetry via account aggregator model
– Streamlined customer assessment process
– Quick, frictionless credit approval
It will probably be a game-changer by making small loans increasingly feasible to smaller and micro businesses.
On the outs, lenders can provide tailored credit instruments that fulfill specific business requisites at low operational costs. Under OCEN, loan service providers don’t require any investment in tech tools or multiple intermediaries, and can easily embed the credit services into their systems with an easy-to-integrate interface.
OCEN enables identifying creditworthy borrowers via a digital customer acquisition channel. The end-to-end loan application process mitigates risks of fraud or deceit. It involves minimal processing time and fewer legal formalities while offering credit to customers.
This makes the credit solution free from time constraints, hefty processing fees, and system loopholes, thereby reducing the risks of NPA. Further, to establish the identity of customers, lenders need to source personal details. LSPs allow companies to source these data from OCEN APIs.
Formal lending includes a slew of procedures making the life cycle of a loan application quite tedious. It more often demands tremendous time, effort, and investments from the borrower.
OCEN aims to resolve all these problems by introducing digital-only, instant loan assessment, sanction, and disbursement services to borrowers. With a single API, it democratizes credit and offers lending simply by plugging into the platform.
Transition to Cash Flow-based Lending
OCEN, being a digital solution, involves credit evaluation based on cash flow instead of balance sheet-based lending (income and assets). Cash flow-based lending facilitates sachetization of loans ( short-term loans) that could help MSMEs fill working capital gaps. On the contrary, it assists lenders with a holistic approach to analyzing the creditworthiness of potential borrowers.
Under these evolved credit rails, OCEN protocol benefits borrowers as:
– Offers credit at a large scale as compared to banks/financial institutions
– Facilitate lending at lower interest rates
– Provides tailor-made credit solutions, ideally fueling the customer’s demands
– Extended tenure of loan repayment that varies from repayment term of 5-7 years
Merchants with limited turnover capabilities have always been credit-starved and embedded lending is one such solution to address this issue. Oracle estimates that the embedded finance market is known to reach $7trillion over the next decade.
This digital lending alternative has streamlined the financial process. From payment processing to receiving insurance services and meeting regulatory compliance needs, it is much easier for customers to access funds/services seamlessly, conveniently.
For companies facilitating embedded fintech, it lends plenty of opportunities to generate additional revenues, improve customer experience with a user-friendly interface and boost conversion rates.
Sachetized MSME Loans
Getting sachetized loans was far-fetched for one reason or another. Adapting the shift in consumer borrowing behavior, OCEN has made this possible for MSMEs to get small-ticket loans. It aids them with the required amount to fuel their current liquidity requirements or working capital gaps. It is bound to a future state to cater intra-day micro-loans for small businesses making unhindered transactions a mere reality.
OCEN seems to be a key avenue for local merchants to manage their invoicing cycles. With invoice discounting as a use case, it allows traders to get a quick credit by using invoices as collateral. Sahay app has already been geared to implement an invoice discounting facility to enable merchants with loans against outstanding invoices.
– MSMEs can quickly raise cash for securing valuable business opportunities.
– They can get unsecured business loans in the account of invoices without any risk to assets.
– With the freed-up liquid cash, firms can smoothly keep the cogs of the business cycle moving.
– Small companies can also use this use case strategically to expand their business, boost sales, and fuel their growth.
The next massive Fintech opportunity with this open credit network is that lenders are ready to engage with Loan Service Providers on the back of OCEN. As the Indian lending ecosystem continues to evolve with rapid digitization, this protocol is expected to play a crucial role in the decentralization of credit for under-resourced Indian borrowers.Pirimid Fintech has plug and play solutions which helps Lenders and LSPs to go live on OCEN within just a week of time. Its OCEN solutions are highly integrable with any of the systems. Hence, Lenders and LSPs can strategically be part of OCEN with Pirimid’s high end solutions.