Amid our dynamic financial ecosystem, the Open Credit Enablement Network (OCEN) stands out as a transformative force for micro, small, and medium enterprises (MSMEs). Delving into OCEN reveals its immense potential and the significant paradigm shift it offers in the realm of MSME lending. This blog offers a synopsis of the advancements within this technology, highlighting its potential to revolutionize lending practices.
Introducing OCEN and The Vision Behind the Technology
Sharad Sharma, a co-founder of iSPIRT Foundation, marks the rollout of OCEN. It is a pivotal technological innovation in the context of MSME lending, and represents an exciting leap forward, aiming to bridge the gap among the challenges faced in the sector. The iSPIRT Foundation, a non-profit technology think tank, has a mission to foster India’s growth as a product nation. This mission is realized by building ecosystems designed to address complex challenges, such as MSME lending.
iSPIRT Foundation functions in collaboration with various stakeholders, including market players, policymakers, venture capitalists, and more. The foundation’s focus on partnership underscores its commitment to solving intricate problems and fostering innovation within the lending landscape. OCEN’s role within this ecosystem is to create a transparent, efficient, and accessible lending network that could redefine the way MSMEs access credit, thus contributing to the broader mission of the iSPIRT Foundation.
As the OCEN initiative evolves, it holds the promise of reshaping the MSME lending paradigm and propelling India’s journey toward becoming a prominent player in the global product landscape.
The Problem of MSME Credit and the Challenge of Consumption Credit
At the core of the matter that OCEN technology solves lies the predicament surrounding MSME credit. Both facets of credit—namely, consumption credit pertaining to individuals and retail credit—present substantial challenges.
The difficulty with consumption credit, which involves individual credit and retail credit, remains pronounced. A crucial aspect to consider is the stark ratio: merely one in nine or one in ten individuals possessing a debit card are granted access to a credit card or the option of Buy Now, Pay Later (BNPL) services. This disparity arises due to stringent criteria set by credit card companies. These entities stipulate that individuals must exhibit three years of stable salary income to qualify for a credit card with a one-year credit limit.
This qualification criterion effectively bars a significant number of potential credit card applicants, as stable salary income remains an elusive prospect for many. By contrast, the conventional credit card holder enjoys the privilege of purchasing goods—like an INR 8,000 washing machine—and repaying the amount over a span of two years. Unfortunately, this same benefit is often denied to gig workers and individuals with irregular income sources due to the absence of a consistent and predictable salary structure.
The Economics of Short-Term Lending
The notion of acquiring a two-month loan for purchasing a washing machine is hardly appealing. It’s the concept of short-term lending that offers a remedy for such situations. However, a significant challenge arises from the perspective of marketplace lenders, who often hold reservations about the profitability of short-term lending.
Their rationale centres around the belief that short-term lending ventures may not yield profitable returns. A common argument presented is that when a lender extends a loan of INR 1 Lakh over the course of a year with a 5% spread, the resulting profit amounts to approximately INR 5,000. This profit is meant to cover various expenses, including acquisition costs, processing fees, dispersal, collection efforts, and the associated regulatory compliances.
In contrast, if the same lender were to provide an equivalent loan for a quarter with the same 5% spread, the resulting profit margin would shrink to a mere INR 1,250. This seemingly tight margin raises concerns about the viability of making substantial profits within the short-term lending framework.
However, it’s essential to recognize that this argument is undergoing a transformation. The landscape of short-term lending is evolving, and the assumption that short-term lending cannot be profitable is no longer as straightforward as it once seemed.
Innovations in Lending: Borrower’s Agent and Digitization
Addressing the unique needs of certain individuals (as in the above examples) requires a tailored approach. Consider those engaged in activities like chair manufacturing and sales through government or other marketplaces. For these entrepreneurs, securing a two-month loan holds tremendous value. Such a loan empowers them to procure raw materials, produce goods, make sales, and seamlessly repeat the cycle. While short-term lending emerges as a solution within the MSME lending sphere, its application doesn’t translate as effectively to consumption lending. However, recent developments have reshaped this landscape, introducing innovations that hold the potential to transform lending practices.
The concept of a borrower’s agent has been introduced to mitigate the costs associated with loan acquisition. By incorporating this participant type into the lending process, the expenses related to onboarding borrowers are notably reduced. Moreover, the streamlining of data facilitated through account aggregators—technology that iSPIRT Foundation has dedicated years to refining—further contributes to cost reduction. This data-driven approach empowers lenders with high-quality, dependable information about borrowers. With the upcoming inclusion of GST data on account aggregators, lenders gain access to a comprehensive cash flow overview for borrowers. By analyzing bank statements and outstanding invoices, lenders can construct an accurate cash flow statement for borrowers without requiring direct input from them. This data carries a high degree of credibility and authenticity, forming a solid foundation for cash flow-based lending decisions.
Digitization, a cornerstone of OCEN’s mission, serves as a pivotal innovation in this space. By bringing various participants onto a digital platform, OCEN reduces processing and disbursement costs, fostering a more efficient lending process. Additionally, a groundbreaking concept known as the T4 loan has been introduced. This innovative approach significantly minimizes the expenses associated with loan collections.
T4 Loan Model: A Game Changer
The T4 loan model has emerged as a revolutionary concept within the lending landscape. It introduces a distinct approach to lending where control over collections and cash flow is integral, redefining the dynamics of loan repayment and lender-borrower relationships. Here’s a breakdown of the T4 loan model and its transformative impact, closely intertwined with the mechanics of OCEN:
Collections Control and Escrow:
The T4 loan model facilitates collections control by orchestrating the flow of cash inflow. For instance, on platforms like GeM (Government e-marketplace), payments for purchases are directed to an escrow account. In this setup, the lender receives their payment before the borrower gets the funds. This streamlined process simplifies collections, alleviating the need for lenders to chase after repayments.
End-Use Control:
A critical facet of the T4 loan model is ensuring end-use control. By dictating how the loaned funds are utilized, lenders can substantially enhance their chances of successful repayment. This heightened control reduces the risk of misallocation and misuse of funds, thereby bolstering collection rates.
Evolution of Loan Types:
Traditional loan models have predominantly fallen within type one, focusing primarily on the borrower’s creditworthiness. However, the T4 loan model advocates a transition from type two to type three and eventually type four loans. This progression highlights the growing importance of collections control and end-use governance in the lending process.
OCEN Integration:
The OCEN system plays a pivotal role in enabling the T4 loan model. OCEN’s mechanisms facilitate seamless execution of the collections control and end-use control aspects of the T4 loan. This integration reduces the operational burden and ensures the smooth functioning of this innovative lending approach.
Cost Reductions:
The T4 loan model substantially reduces the cost of collections through its structured approach. By mitigating the need for extensive collection efforts, lenders can save resources that would otherwise be expended on chasing overdue payments.
Real-time Reporting and Regulatory Compliance:
OCEN’s built-in real-time reporting capabilities have a two-fold impact. Firstly, they provide lenders with accurate, up-to-date insights into their loan portfolios. Secondly, these capabilities significantly lower the cost of regulatory compliance, streamlining reporting processes and minimizing administrative overhead.
The combination of the T4 loan model’s innovative approach and the capabilities of OCEN has ushered in a new era of short-tenor lending profitability. Market players such as Kinara Capital, U GRO, and 121 Finance have already embraced this model, experiencing remarkable success. These pioneering efforts have yielded valuable insights and learning that contribute to the continuous refinement and advancement of the lending ecosystem.
As the T4 loan model gains traction and more players join the movement, the potential for enhanced financial inclusion and MSME support becomes increasingly promising. The symbiotic relationship between the T4 loan model and OCEN exemplifies the power of innovation in transforming lending dynamics.
Introducing OCEN 4.0: The Next Step
The unveiling of OCEN 4.0 marks a significant advancement in the realm of public technology. Having traversed the landscape with its predecessor version 3.0, OCEN now introduces a transformative upgrade in its 4.0 iteration. Crucially, this evolution aligns seamlessly with the digital lending guidelines, hinting at a promising trajectory of advancements and public policies that favour cash flow lending.
The journey ahead holds the promise of enhanced public policy frameworks that will underpin the dynamics of borrower-agent (BA) loans. These advancements are designed to facilitate a more streamlined borrower experience, enabling individuals to select borrower agents with greater precision. Furthermore, the endeavour is to simplify Know Your Customer (KYC) procedures for MSME loan accounts in comparison to traditional current account KYC processes. Leveraging the existing KYC data associated with current accounts streamlines the process, making it more efficient for loan accounts.
Real-time regulatory oversight is on the horizon, offering a dual benefit. The Reserve Bank of India (RBI) stands to gain from access to real-time data, allowing for audits to be conducted as required rather than adhering to fixed schedules. This data-driven approach enhances efficiency for both regulatory bodies and lenders.
The impending introduction of specialized disbursement agents is set to bring an added layer of efficacy to the lending ecosystem. Furthermore, an improved framework for escrow-based collections is anticipated, which will further bolster lending practices.
A notable facet of this evolution is the introduction of loan labelling. As the landscape unfolds with borrower agents partnering with multiple lenders, the potential for an auction model arises. Such a model would present MSMEs with a multitude of loan offers. Standardized loan labelling requirements become pivotal in this scenario, enabling MSMEs to discern between various offers and select the most suitable option. This safeguards businesses from potential pitfalls and ensures they make informed decisions.
These impending enhancements, when combined with the technological advancements being presented today, pave the way for a transformative shift. Collectively, they address the needs of the 85% of MSMEs that remain underserved by current lending practices. The unveiling of OCEN 4.0 is more than just a technological upgrade; it’s a strategic leap toward enhancing accessibility, transparency, and efficiency in MSME lending, signalling a bright future for financial inclusion.
The Growing Embrace of OCEN 4.0
Various estimations have shed light on the immense potential of OCEN 4.0 within the MSME lending landscape. A notable projection stems from the MSME committee chaired by Mr. U.K. Sinha, placing the estimated value of this sector at a staggering 17 billion dollars, equivalent to 17 trillion rupees. This vast segment, twice the size of the retail market, is poised for remarkable expansion, with expectations of reaching the size of the retail market within the next three to five years.
This transition mirrors the concepts presented in the book “Red Ocean, Blue Ocean.” Instead of navigating the saturated and fiercely competitive “red ocean,” businesses can find their footing in the underserved “blue ocean.” This strategic shift opens avenues for new players to establish themselves as significant contenders in the market, a trend reminiscent of what occurred with the rapid rise of UPI (Unified Payments Interface) players, where early adopters paved the way for transformation.
The encouraging news is that substantial momentum has already gathered around OCEN 4.0. A diverse array of participants has eagerly embraced wave one of this initiative. The roster includes various types of borrower agents catering to distinct segments. For instance, Spice Money serves dairies, Samunnati caters to Farmer Producer Organizations (FPOs), and Citi Bank, with its substantial financial capacity, contributes as a lender. Notable participants like U GRO, an NBFC, Finag, serving MSMEs in the purchasing domain, and Indifi, engaging in insightful work within the sector, are also part of this dynamic wave.
While this presentation captures a glimpse of the wave one lenders and loan agents, it’s essential to acknowledge the behind-the-scenes efforts of technology service providers (TSPs) who are instrumental in implementing the OCEN 4.0 framework. Their contributions play a pivotal role in realizing the vision of enhanced MSME lending facilitated by OCEN’s technological innovation.
What Does Wave One Mean?
Wave one signifies iSPIRT’s unwavering commitment to empowering all participants in this initial phase, encompassing loan agents, lenders, and technology service providers (TSPs). The focus is resolutely on fostering winning implementations, which hold paramount importance for the growth of the entire ecosystem. Despite their volunteer status, iSPIRT dedicates itself to delivering high-quality and collaborative support to ensure the triumph of these endeavours. Aspiring wave one participants can engage by completing the provided form, available on the ocen.dev website’s contact section.
Key Component & Specialized Roles in OCEN 4.0
The OCEN 4.0 ecosystem is constructed around a set of specialized roles that contribute to its seamless functionality. These roles encompass
- Lenders, who provide the financial backing,
- Bridge Applications (derived data partners) that facilitate communication between platforms,
- Collection Partners responsible for managing the collection mechanism,
- Account Aggregators that integrate critical data sources like GST and bank account data, and
- the novel KYC Partner, introduced to streamline borrower verification. The KYC Partner role is notably initiated by loan agents, enhancing the verification process with a borrower-centric approach.
Streamlined Interactions Through APIs
In OCEN 4.0, interactions are orchestrated through a set of APIs that ensure a streamlined and dynamic experience for all participants. The transition from the 3.0 specification to 4.0 introduces a portal-based registration mechanism for products and participants. This strategic approach necessitates the onboarding and verification of participants through the NSRO (Network Registration and Signaling Organization). Lenders play a central role by defining credit products, subsequently forming the foundation for specialized business networks catering to specific segments, whether geographical or marketplace-based. These networks are managed by Loan Agents, who facilitate the inclusion of partners and oversee essential lender-related functions such as collections and disbursements.
Empowering Integration with Simplified APIs
The heart of OCEN 4.0 lies in its simplified suite of APIs, designed to seamlessly integrate participants into the ecosystem. These APIs cater to both participants and their journey-related needs. They serve as the backbone of effortless integration, ensuring that products registered through the product registry are supported with efficiency. This separation between products and offers underlines the platform’s commitment to flexibility and adaptability. Products encompass workflow rules, collection sets, and various features, including digital-only disbursements, credit guarantees, pre-flight checks, collections agents, and dispute resolution flows.
Navigating the Product Registry for Enhanced Customization
Within the OCEN 4.0 ecosystem, the product registry empowers lenders to configure and customize products according to their lending objectives. This portal-driven approach provides lenders with the tools to define and refine their offerings. For instance, the lender can tailor a product for private dairy VDA financing, determining parameters like end-use control, collections control, suitable borrower categories, and specific features. This emphasis on customization underscores OCEN 4.0’s dedication to catering to diverse lending needs while maintaining efficiency and adaptability.
Final Words
In closing, the horizon of possibilities widens with the advent of OCEN 4.0, marking an exhilarating juncture in the journey of MSME lending. A visionary aspiration lies at the heart of this technological leap – to empower each and every MSME with the opportunity to access loans. Regardless of the size or tenor, the goal is clear: enabling businesses to thrive and flourish. This mission resonates deeply, for it embodies the essence of job creation and economic growth in India. As the nation’s small businesses flourish, so too does the promise of a thriving India. With years of piloting and market insights underpinning its foundation, OCEN stands as a testament to the potential of private innovation in solving public challenges. As we stand poised on the brink of transformative change, your participation becomes pivotal. Embark on this journey of innovation and impact, as we collectively navigate towards a future where every MSME can envision growth and success.
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