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In this insightful dialogue, Sagar Parikh engages with Deepak Sharma to explore the transformative potential of cash flow lending for Indian MSMEs. Deepak underscores the significance of democratizing credit access through short-tenor and small-ticket loans, especially for micro-enterprises that comprise 99% of the MSME sector in India. Drawing from his rich experience in banking and financial services, Deepak Sharma provides invaluable guidance on navigating the complexities of B2B financing, highlighting the critical role of innovative lending models in fostering inclusive growth.
Deepak Sharma delves into the pressing challenges faced by MSMEs in accessing financing, particularly in the realm of B2B transactions. Leveraging his extensive experience and deep insights, he offers a fresh perspective on the traditional lending landscape, emphasizing the need for agile and tailored solutions to empower MSMEs. By advocating for cash flow-based lending and trust-based scoring systems, Deepak Sharma presents innovative approaches to address credit gaps and unlock opportunities for sustainable economic development within India’s dynamic MSME sector.
Deepak Sharma’s perspectives on banking innovation and financial inclusion provide several key learnings for the industry:
Leveraging Technology for Inclusion: Sharma emphasizes the transformative impact of technologies like UPI and Aadhaar in fostering financial inclusion. These initiatives not only revolutionize digital payments but also open doors to credit access for underserved segments like SMEs.
Proactive Engagement with Tech Ecosystem: Deepak advocates for proactive engagement with India’s tech ecosystem, encouraging early adoption of initiatives like IndiaStack. He challenges banks to rethink their approach and prepare for future changes in the financial landscape.
Importance of Early Adoption: Reflecting on his experiences at Kotak, Sharma stresses the importance of early adoption of innovative initiatives. Banks that jump in early can leverage emerging opportunities and drive meaningful change.
Value of Learning from Ventures: Deepak highlights the significance of learning from both successful ventures like OCEN and past failures. This learning process is essential for banks to navigate the evolving tech landscape effectively.
Structured Innovation with the 5C Model: Sharma’s structured approach to innovation, encapsulated in the 5C model, emphasizes critical aspects such as customer acquisition, commercial viability, credit assessment, compliance, and collections. This framework ensures alignment on objectives and risk management strategies.
Startup Mindset and Controlled Pilots: Adopting a startup mindset within traditional banking institutions, Deepak advocates for establishing small, specialized teams focused on data analysis, technology, and risk management. Controlled pilots with defined success metrics enable banks to manage—- risk effectively and drive innovation.
Importance of Trust-Based Scoring: Sharma underscores the importance of trust-based scoring systems and proprietary scorecards for credit assessment. Moving away from traditional methods, these innovative approaches provide a holistic view of creditworthiness, especially for SMEs with limited credit histories.
Optimism about OCEN: Deepak Sharma’s views on OCEN reflect a visionary approach to addressing India’s credit gap. He sees OCEN as a pivotal platform to harness India’s data richness and enable comprehensive credit assessment and lending solutions.
In conclusion, Deepak Sharma’s insights emphasize the necessity of embracing innovation and leveraging technology to drive inclusive growth in the financial services sector. By adopting proactive strategies, banks can navigate the evolving landscape of digital lending and unlock opportunities for underserved segments, contributing to India’s economic development.
OCEN is an initiative to unbundle lending and enable the creation of specialized entities, each specialized at one part of the job. Therefore, we envision the future of lending to be a partnership between multiple firms individually focused on sourcing/distribution, identity verification, underwriting, capital arrangement, recollections, etc. The entities like marketplaces who have high business-connect with their customers (businesses or individuals), can embed credit offerings in their applications now. These entities are referred to as Loan Agents’ (LAs) and were previously referred to as ‘Loan Service Providers’ (LSPs).
OCEN (Open Credit Enablement Network) aims at democratising the lending ecosystem. The core philosophy is using open networks to reach out to maximum borrowers and lenders, with reduced risk, more transparency, strict control on funds (both end use & collections) and thus building a robust lending ecosystem. At the borrower level, using consent driven architecture and personal data as information collateral, any type of borrower (even new to credit or people with poor credit scores), can access financing. The end-to-end digital processes not only reduces the total cost of operations, but also has the advantage of reaching out to anyone and everywhere, without the lender having a physical presence. For example, sitting out of Jaipur, a NBFC has disbursed OCEN loan on GeM Sahay to borrowers operating from Andaman Nicobar Islands, Manipur, Baramullah etc and the smallest loan transaction has been of Rs.160 for business purposes.
OCEN is the right protocol, to bring credit/finance to the bottom of the pyramid and at the same time lenders also make money with this same section of people at the bottom of the pyramid. OCEN not only levels the playing field between incumbents and challengers, but also reduces the concentration risk which comes with size at bigger players. Most MSMEs are working capital intensive businesses that need quick money and do not have collateral securities to put up to banks for conventional Cash Credit limits like financing. For such businesses, this is a tool to grow their businesses, and improve their credit scores.
Lenders see opportunities in not only sourcing new business, but also reduced risk due to high quality data and use of DPI (Digital Pubic Infrastructure), like GSTN, Account Aggregator, Digilocker and its associated APIs, like mobility, Health, Fastag etc.
Why OCEN
Low Cost of Acquisition >> The Borrower Agent brings his borrowers on the network, reducing the cost of acquisition through various channels. OCEN framework benefits the Lenders to gain easy access to borrowers. Not just borrowers of one network, but easy access to multiple sets of borrowers of multiple networks.
Lower Cost of Underwriting >> The Borrower Agent also acts as a Provider of Derived Data along with other Underwriting data from various sources like GSTN and Account Aggregator which helps in lowering the Cost of Underwriting
Digitisation >> OCEN Digitises the whole process which involves various activities like Bureau pull, KYC validation, Account Aggregator data, E-Sign on documentation, e-NACH for repayment etc and reduces the time and effort of processing at reduced costs.
Reduced Cost of Collections >> OCEN provides a large opportunity to Lenders and Borrowers to participate in T4 (Type 4) loan products which have End Use Control and Collections control for ensuring higher portfolio quality and cash flow control as well as reduced Cost of collections
OCEN solves for MSME’s Credit requirements: Small Ticket Short Tenure Loan
Small businesses need loans of smaller amounts and for shorter tenures (15/30/90 days) for their businesses compared to larger businesses to help them navigate through the requirement of day-to-day Working Capital needs.
It also helps Lenders to create Loan books for smaller loans which are granular loan exposure on a rotational basis, compared to large bulky loans. Hence reducing concentration risk.
As these Loans are for short tenure, there is higher predictability and lower risk compared to long tenure loans in which recovery of loans may sometimes be a challenge.
The Loan Agent (LA) model is a departure from the Direct Sourcing Agent (DSA) model and is an ‘agent of the borrower’. The LA explains to borrowers their ‘bill of rights’ ensuring transparency and safeguarding of borrower interests. They educate the borrowers about the various credit product offerings, pricing and more details. They help the borrowers get access to formal, affordable credit at low interest rates and collaborates with lenders to create more tailored offerings for borrowers.
In their simplest form, LAs are a loan marketplace that enables borrowers to compare loan offers from multiple lenders and choose the best one. In a more advanced version, the LAs are akin to a borrower’s financial advisor, looking after their interests, fetching the best offers and advising the customer to make good decisions.
In the longer run, it is envisioned that many more LAs (with apps) will be created. Each of them would focus on distinct borrower pools and build the specialized experiences suited to their customers. This would allow lenders to focus purely on their underwriting and collections logic and cater to diverse collaborations with the LAs.
OCEN 4.0
The OCEN model has been built incrementally in phases, with reinforced learnings from each of the previous pilots. The goal for OCEN 4.0 is to build an ecosystem of participants that creates a Cambrian explosion of cash-flow based loan products across different MSME sectors and different types of borrowers.
Participant Roles
OCEN 4.0 supports specialized roles for the participants. The purpose of introducing new roles is that it promotes specialization and enhances system efficiency. For example, by establishing a local network of participants, the burden on lenders is reduced, resulting in increased credit accessibility in underprivileged areas.
Role
Description
Lender
Lenders are the regulated entity that create and own the credit products. They work with other participants as part of a Product Network to serve the Borrower. The Loan-agent understands the borrowers’ credit requirements and works with the lenders to create the product.
Loan-Agent (LA)
Agent of the borrower who will help the Borrower to pick up the best loan offer. The Borrowers agent will charge the Borrower a fee for helping them select the best loan. Loan agent is a more inclusive term that encompasses both Borrower Agent (BA) and Lender Service Provider (LSP), spanning across the existing DLG model referred to as LSP and the emerging model in which BA operates as the borrower agent.
Derived Data Partner (DDP)
A derived data provider is a collaborating partner within the network that furnishes supplementary data to the Lender, aiding in enhancing their underwriting engine with additional information.
Collections Partner (CP)
A Collections Partner is a network-affiliated collaborator designated by the Loan Agent (LA) to aid in the collection process. The lender retains the option to either opt for the Collections Partner or continue using their existing collection procedures.
Disbursement Partner (DP)
A Disbursement Partner (DP) is responsible for supporting Purpose Controlled products. This partner will establish integration with suppliers, retrieve their catalog, and facilitate seamless direct payments to suppliers within the OCEN journey.
KYC Partner
A KYC partner is a collaborator selected by the Loan Agent (LA). This partner can be engaged for Assisted KYC or any technology-related specialization available on the network. The lender retains the choice to employ the KYC partner within the network or continue with their existing procedures.
In addition to the participant roles above, OCEN framework also relies on Account Aggregator and Credit Guarantees (CGTMSE) as part of the loan journey.
Participant Onboarding
All participants are onboarded to OCEN 4.0 via the participant registry. A standard onboarding process is followed for all participants, and their verification is guaranteed by SROs to ensure that new members receive an equivalent level of trust within the network.
Product and Product Network onboarding
Lender will create & manage the Product and the Loan Agent will create & manage the Product Network to serve that product. All participants in OCEN 4.0 can browse the Products and Product Networks on the Product Registry and subscribe to serve a Product via the Product Networks.
Product Networks
OCEN 4.0 enables a network of product networks that participants can discover, collaborate and serve products to borrowers. See sample example below:
Network begins with Product Network 1
Created by Loan Agent 1 who onboards as network participants – 3 lenders, disbursement partner, collections partner and a derived data partner
Loan agent 1 can serve their borrowers other products as well.
Network expands with Product Network 2
Created by Loan Agent 1 who onboards as network participants – 2 new lenders, the same disbursement partner, and a new derived data partner
Loan agent 1 can continue to serve their borrowers other products as well.
Network expands with Product Network 3
Created by Loan Agent 1 who onboards existing participants and a new lender (Lender 6) to serve the product
Participants can discover products and join the product network
Network expands with Product Network 4
Created by a new LA, Loan Agent 2, who onboards existing and new participants to serve the product to their borrowers
GeM is a short form of one stop, ‘Government e-Marketplace’ where common user goods and services can be procured by various Ministries and agencies of the Government. Government e Marketplace (GeM) offers both products and services as part of its offerings to its registered buyers. GeM facilitates the procurement of a spectrum of Product and Service categories in a way to facilitate Buyer in ease of selection and procurement. GeM SAHAY is an online platform built on the OCEN protocol that provides loans against Purchase Orders to the sellers.
GeM SAHAY is the pilot project on OCEN to validate the idea of cash-flow based lending for MSMEs. In this pilot, GeM (Government e-Marketplace) is the Loan Agent. The Lenders onboarded onto the pilot offer loans to MSMEs on the GeM portal against government purchase orders. The pilot validates that short-tenure, small-ticket size loans enabled via the OCEN network works for all participating parties.
GeM as a Loan Agent allows the Goods and Service Providers on GeM to apply for Loans against Purchase orders received through various Government buyers on the GeM portal.
GeM as a Loan agent helps onboard borrowers for lenders reducing the acquisition cost for the lenders
GeM being a loan agent also acts as a Derived Data Provider as it carries rich data of the participating MSME borrowers in terms of past number of orders, value of orders executed, quality incidences, completion timelines, etc and these data points help the participating Lenders to underwrite the MSME loan application.
GeM facilitates digital loan process for MSMEs on its GeM SAHAY portal by ensuring integration with multiple lending institutions and helps the Borrower MSMEs to receive multiple offers for its loan applications. Allowing the MSME to choose the best suitable loan offer creates a market shift from Lender’s market to Borrower’s market.
GeM also acts as a Collection partner for the Lending institutions as it helps the lender with repayment of the loan for the purchase order though the Escrow account where the payment for the orders executed is credited by the purchasing entities.
A second pilot that expanded on the above is the GST SAHAY pilot project. This pilot uses GST data to enable working capital loans where SIDBI is acting as the Loan Agent. An additional parameter for validation on this pilot was the inclusion of the Account Aggregator data for loan underwriting.
In GST SAHAY, borrowers can seek loans against unpaid B2B Invoices for supply of Goods and Services to other businesses. Any business registered with GSTN and filing the statutory returns on GSTN can seek financing against Invoices where goods or services are supplied on credit period.
Borrower can register on GST SAHAY application and upload Invoices against which it seeks to avail financing.
The GST SAHAY application, after seeking the consent of borrower will pull details available from the GST network for its past invoice transactions filed with GSTN, periodic return filings and share the same with Lenders for evaluation and underwriting and credit decisioning.
Similarly, GST SAHAY application after seeking the consent of the borrower will pull details of the Bank statements available from Account Aggregator framework for its past banking data and share the same with Lenders for evaluation and underwriting and credit decisioning.
Lenders will parallelly also check the Credit Bureau of the borrower to assess credit worthiness and past performance on existing credit facilities from other lenders, if available.
Lending institutions will digitally consume all these data points, along with details available on the Invoice to be financed and by using its proprietary rule engine for underwriting and scoring model, will provide an offer to the borrower for the respective Invoice to be financed.
Borrowers may receive multiple offers (higher loan amount, lesser interest rate, longer tenure) from different Lenders based on their evaluation criteria and will have a choice to select the best suitable offer for seeking the disbursement in a digital way by e-signing the loan agreements, e-Nach / Standing instructions, wherein the amount will be credited to the borrower’s account within few minutes.
There are other OCEN innovative product networks which are at various stages of development and are expected to go live to provide seamless credit to the credit starved MSMEs using OCEN API specifications for communication between the parties (Borrowers, Lenders, Loan Agents and other participants)
In this recent OpenHouse, Sagar Parikh discusses with Dr Ravi Modani how democratizing credit through short-tenor and small-ticket loans can help finance Indian MSMEs, 99% of which are micro-enterprises. Dr Modani shares his insights and invaluable guidance to navigate the complex world of B2B financing for MSMEs.
He also delves deep into the challenges faced by them in accessing financing, particularly in the realm of B2B transactions. Drawing from his extensive experience and research, he offers a fresh perspective on the traditional lending landscape and presents innovative solutions to empower MSMEs.
Key Insights from the Video:
The MSME Financing Dilemma: Dr. Modani highlights the significant hurdles that MSMEs encounter when seeking short-tenor and small-ticket loans. He emphasizes the need for a paradigm shift in lending practices to better serve the unique needs of these businesses.
A New Way Of Financing for MSMEs: Dr. Modani advocates for a pioneering financing approach for MSMEs, highlighting the effectiveness of short-tenor and small-ticket loans. These loans, being revolving in nature throughout the year, allow lenders to disburse a higher volume of loans. Consequently, lenders can potentially amplify their AUM by up to 8 times, surpassing the typical 5-6 times AUM ratio associated with traditional lending practices.
Comparing Financial Platforms: Dr. Modani provides a comprehensive comparison between TReDs and OCEN, offering insights into the advantages of leveraging public networks like OCEN for enhanced interoperability and accessibility.
The Power of Public Networks: Leveraging platforms like OCEN and GeM can significantly reduce operational costs for lenders, ultimately leading to lower lending costs and improved efficiency. Dr. Modani illustrates how these public networks can drive down the cost of lending, benefiting both lenders and borrowers alike.
The Time Sensitivity of MSME Financing: Dr. Modani underscores the time-critical nature of MSME lending and stresses the importance of streamlining the loan journey to ensure timely access to funds for businesses.
His illustrations and learnings help in navigating the complex world of MSME financing by embracing innovative approaches. He believes that leveraging public networks like OCEN will only help lenders unlock new growth and success in today’s lending landscape by opening multifold opportunities to them.
In our most recent OpenHouse, we embark on an insightful exploration of the transformative landscape in MSME lending, featuring Bhavik Vasa, the Founder of GetVantage, and Sagar Parikh. The conversation delves into the potential of creating groundbreaking impact through interoperable networks, particularly focusing on OCEN. The discussion navigates the dynamic intersection of finance and technology, highlighting how inventive solutions are reshaping the lending panorama. Emphasizing the crucial role of interoperability, the dialogue underscores its significance in bridging the credit gap, propelling the MSME sector into a new era of unprecedented growth.
Key Takeaways:
Network Effects Unleashed: OCEN catalyzes network effects, narrowing the credit gap and expanding the market, fostering inclusivity and vibrancy.
Efficiency through Interoperability: Standardized protocols cut costs and efforts, providing high-quality data for lenders while empowering MSMEs with smoother access to loans.
Addressing Unmet Needs: Explore how interoperable networks bridge gaps in unsecured lending, catering to shorter tenures and smaller loan sizes.
Tech-Enabled Business Growth: Witness the role of unsecured lending in a tech-driven landscape, fostering a circular consumption economy for economic growth.
Personalized FinTech Solutions: Bhavik advocates for a borrower-centric approach, urging lenders to view lending through a tech and data-driven lens, benefiting both parties.
Collaboration Dynamics: Conclude with insights on how NBFCs and banks can coexist and collaborate, playing to their strengths for a more robust lending environment.
Ready to unlock the future of MSME lending? Join the conversation now!
Intermediaries and Fintechs have played an important role in the lending ecosystem, but the impact is mostly seen in consumer lending and not so much in MSME lending, especially for unsecured, small ticket and short duration loans. What are the missing pieces in the lending process for which advanced tech and a mindset shift can utilise a digital infrastructure like OCEN (Open Credit Enablement Network) and unlock this credit supply for MSMEs?
Recently, we hosted Lizzie Chapman in an insightful conversation with Sagar Parikh. She shared her views on where the intermediaries and FinTechs can further become a value add in a profitable manner by pushing the boundaries of technology.
Points discussed:
Digital infrastructure & its impact on the costs, penetration & process for lending eco-system
Unsecured MSME loans not as solved as unsecured consumer loans. Cashflow lending addresses the concerns around unsecured lending to MSMEs.
DPI such as OCEN facilitating the availability, quality, aggregation of data for credit underwriting along with loan disbursement for MSMEs
Need for Intermediaries & Fintechs to harness technology to conceptualise innovative lending products, advanced ways of pricing and matching risks & address the opex challenges in collections & repayments
Investors tend to prefer businesses that touch the customer end to end. They should see that being part of the value chain can be as profitable as owning the value chain.
OCEN is creating dispute resolution mechanisms but intermediaries should also innovate for transparency and building trust with the customers so as to enable a safe, stable, secure growth in short term cashflow lending for MSME credit.
In an era of evolving financial landscapes, the realm of lending is witnessing a significant shift—from the traditional collateral-based approach to the more contemporary cash flow lending model facilitated by OCEN (Open Credit Enablement Network). Recently, we hosted UGro Capital in an insightful conversation with Shachindra Nath, shedding light on this transformative paradigm in lending and delving into its profound implications.
Points discussed:
Transitioning from Collateral to Cash Flow Lending
OCEN plays a pivotal role in revolutionising MSME lending in India. This innovative open network is specifically designed to serve those new to credit, employing an omni-channel approach that democratises and simplifies access to lending.
Currently, the market lacks a scalable and profitable model for short-term, low-value MSME loans – a significant gap that OCEN has adeptly filled with itsGeM-SAHAY pilots.
Amidst the confusion and excitement surrounding OCEN versus ONDC, and the broader impact of open networks in the lending sphere, this blog aims to provide clarity and insight. Let’s dive in and explore these transformative developments.
🔀 OCEN or ONDC: Which is better for short tenure MSME lending?
There’s much debate about which lending framework potential partners should explore. Rahul Mathur (Associate Director, InsuranceDekho) captures this perfectly in his tweet, presented as a checklist below:
🗣️ “Turns out, the focus in lending for ONDC v/s OCEN is very different (see the
image below)
(1) 💰Type of loan: Type 1 personal loan v/s Type 4 MSME loan
(2) 🔎GTM: Online v/s Omni-channel (assisted)
(3) 🙇Persona: Eligible for credit v/s New to credit
(4) 🌟Objective: Bring credit to point of commerce v/s Democratize credit access
To summarize, there are some good reasons why ONDC has launched loans
independently of the OCEN network.
Over time, OCEN will expand to include further lending use-cases & products.
And, at that point, ONDC <> OCEN interoperability would make sense.”
Clearly, OCEN is the undisputed option for short tenure, low ticket size lending for new to credit MSMEs. Over time the lending use cases will be expanded to service the traditional form of loans.
OCEN and ONDC, while both operating in the lending space, are tailored for very different use cases and audiences. While they may overlap in some cases, the larger ecosystem benefits from introduction of newer networks. In the end, it’s all about solving the most challenging problems 🙂
Let’s further understand how OCEN addresses the MSME lending problem in India.
📈 OCEN makes small ticket size lending a reality
OCEN’s primary goal is to make short-term lending profitable. Something which we’ve achieved in our pilots with the Government e-Marketplace, through the GeM-SAHAY app.
One of our volunteers explains the economics in this blog post:Evaluating the short term lending opportunity, where he shows how lenders can earn 2.2x higher revenue with the same capital through the adoption of the OCEN framework.
The significant 2.2x increase in revenue is attributed to the introduction of a crucial role known as the borrower’s agent. These agents not only reduce the cost of servicing a loan but also heighten accountability within the system.
Borrower’s Agents (BAs) assume a variety of roles traditionally outsourced by lenders, BAs function as data providers, collections agents, escrow account managers, and product providers.
By integrating these services and cohesively binding the network, BAs enable lenders to efficiently service low-cost loans even in remote areas. In performing these four key roles, the borrower’s agent emerges as the cornerstone of the open network, vital for its effective operation.
The role of borrower’s agent has been discussed in depth in one of our open house sessions:
OCEN is changing the game by making even the tiniest loans worthwhile for both the lender and the borrower.
🌐 Efficacy of Open networks and streamlining the lending process
Some people we’ve spoken to, worry that open networks will lead to the commodification of lending, which, in turn, is bad for the overall market. However, this couldn’t be farther from the truth 🙂.
OCEN streamlines the lending process by introducing roles such as the borrower’s agent, KYC agents, and collection partners. These roles combine to create a bundle that lenders can easily integrate into their processes to start lending.
Newer and smaller lenders will benefit from the transparency and scale offered by open networks.
Closed network auctions, which are common today, see lenders bidding down for loans. However, their lack of transparency and scale often results in low profitability.
Open networks, on the other hand, provide scale and transparency that leads to low cost of servicing, more borrowers to choose from, and reliability in the system through a borrower’s agent.
Larger lenders benefit from the low cost of servicing a loan that comes with open networks
Larger lenders will benefit from open networks as it provides the technical chops of a borrower’s agent. BAs can help with KYC, collections and other parts of servicing a loan while absorbing some of the costs.
We’ve seen such effects before, with the introduction of Aadhaar and UPI, where KYC and collections became far cheaper enabling large lenders to facilitate smaller ticket size loans.
In conclusion
Through OCEN, the potential to unlock a ~$300 billion credit market in India becomes a tangible reality. This is demonstrated by the increased revenue potential and the introduction of the borrower’s agent role, enhancing loan servicing efficiency and accountability.
Moreover, OCEN’s streamlined lending process benefits the entire market, by offering scalability and cost-effectiveness to both emerging and established lenders.
Thus, embracing OCEN is not just a choice but a strategic direction for expanding market possibilities and empowering both lenders and borrowers in the dynamic credit landscape of India.
📢Calling all lenders to understand how a short tenor loan can become both an effective and profitable business opportunity under OCEN 4.0. 🔑📈
If you are a lender looking for the next big opportunity in lending to the thousands of MSMEs currently unable to access loans, then don’t miss this introduction to OCEN 4.0. 💡
Here we deep-dive into how a new underwriting model enabled by OCEN 4.0 makes it viable and profitable to provide loans to MSMEs traditionally considered unfavourable candidates for loans given the associated high delinquency rates. Our OCEN pilots show, in some cases, it is even possible to create short tenor loans that are twice as profitable as long tenor loans. 🌟🚀🚀
📢Calling all loan agents keen to understand the OCEN 4.0 business opportunity. 🔑📈
OCEN 4.0 introduces a new and powerful role – the Borrowers Agent(BA). If you are looking to play a pivotal role in the MSME lending ecosystem without lending from your own balance sheet, this new role of a BA may be what you want to understand really well. 💡
The BA role is critical to the OCEN story. In this session, we deep-dive on what this role entails, why it is the linchpin of the OCEN 4.0 model, how BAs enable lenders to go remote, and how this role wields a lot of power. We also talk through how to get started, possible business models for BAs and what to focus on to be a successful Borrowers Agent. 🌟🚀🚀
📢👷🧑💻Calling all TSPs and participants eager to dive into OCEN 4.0 APIs.
If you are wanting to understand the tech, the APIs and get started on building for OCEN 4.0, our second open house on OCEN 4.0 is here for you !! 💡
In this session, we do a deep-dive on the architecture, the loan journey on OCEN 4.0 components, the APIs in the OCEN spec and share how you can build for a participant by mocking the APIs of the other. 📝🔑🧑💻
We’re thrilled to unveil OCEN 4.0, the latest advancement in our Open Credit Enablement Network protocol, revolutionizing cash flow-based MSME lending. 🌟
OCEN 4.0 represents a significant leap forward from our ongoing GeM SAHAY and GST SAHAY pilots. In this iteration, along with updated API specifications, we have also added the OCEN Registry, Product Network and rules, specialized participant roles and much more. All these features help us unlock cash-flow-based lending to match the scale, complexity and needs of Bharat. 🔑📈
Check out our introductory open house session on OCEN 4.0
🔍 More details? The API and documentation of OCEN 4.0 are publicly available at http://ocen.dev and will be updated with FAQs from the open house sessions.
🔮 What’s next? Yes, a lot is happening. We have more open house sessions coming out in the following weeks. We are also actively onboarding Wave 1 partners for OCEN 4.0.
❓Questions? Submit your questions here. 📩Contact? Reach the OCEN 4.0 team at [email protected]
Please note: The blog post is authored by our volunteers, Aravind R andSagar Parikh.
India has made rapid progress in digitisation of the economy in the last decade becoming a world leader in identity systems, digital payments and tax, and a new data sharing and empowerment framework. However, many deep-rooted issues still exist, such as extending true financial inclusion; formalisation and creating a higher trust economy, that is essential for growth of mostly small businesses.
In this blog post, we look at innovations in blockchain, distributed ledger and other technologies such as zero-knowledge proofs as potential solutions to build a stronger fabric for the economy for decades ahead. The unique opportunity India has is to boost commerce by enhancing trust, thereby culminating the transformation already underway through existing building blocks of digital identity, payments and data sharing to boost commerce. Unlike many other countries, faster and interoperable payments or reducing the dominance of private money are solved problems for India; the missing piece is to digitise commercial contract enforcement, which on the other hand is a solved problem for developed countries. Lack of adequate contract enforcement caused by contracting parties having different versions of the truth; due to data systems that don’t interoperate reduces trust and creates friction for economic growth. Solution requires connecting the goods and services ledger to the money ledger, so that contracts of any kind become binding promises that can be executed programmatically. Using technology to solve this trust problem is a unique opportunity for India.
BADAL (also happens to be a word for Cloud in local language), a techno-legal solution in the form of “Distributed Ledger for Privacy-preserving Trustful Commerce; is proposed as an interoperable fabric underlying a future programmable economy across large and small businesses to create high trust economy.
We also look at the emergence of Central Bank Digital Currency (CBDC) which is one of the core money applications of this framework and global backdrop in Annexure. There are many other use cases being proposed from land records to decentralised clinical trials for blockchain and allied technologies in different areas of government and business1https://www.meity.gov.in/content/national-strategy-on-blockchain likewise, that can be implemented in BADAL.
First of all, why is trust important?
Trust is the basic glue that connects strangers and promotes economic activity. Money is the basic economic institution in a society building that trust2https://press.princeton.edu/books/paperback/9780691146461/the-company-of-strangers. However, trust builds slowly due to a combination of various factors such as the nature of institutions (political and legal) and the level of formalisation. While formalisation of even small businesses is increasingly addressed by the successful rollout of GST for India, formalisation of trust still remains elusive. At a core fundamental level, trust is a public good that creates friction-free commerce and is a recipe for rapid economic growth.
There is a high correlation between the level of trust in society and GDP per capita3https://ourworldindata.org/trust-and-gdp. A study conducted by World Value Survey attempted to measure the level of trust in a country by recording the positive responses received to the question ‘most people can be trusted’. It found that countries with high GDP per capita such as Sweden, Norway and Netherlands recorded high levels of trust exceeding 60% determined in this manner as the graphic below shows.
Douglass C. North, Nobel laureate in economics4https://www.nobelprize.org/prizes/economic-sciences/1993/north/lecture/, found that ‘the inability of societies to develop effective, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment.’ The Union Minister of Finance and Corporate Affairs has rightly acknowledged the role of the “Hand of Trust”5https://pib.gov.in/PressReleasePage.aspx?PRID=1601273when presenting the Economic Survey of 2019-20.
In societies like India, with limited ability to efficiently enforce routine civil or property contracts, businesses tend to restrict working with those similar to them based on caste, religion etc. (called associational activity) where there is an implicit social and moral enforcement mechanism or with members who have clearly demonstrated reputation in the past (usually the large or the older players). In both these situations, the economic benefit that a new firm can bring with new ideas or new techniques will be muted as its absorption is slower. Similarly, a new player will find it very difficult to compete with incumbents even if such players are economically more efficient. Economist Olson6Olson, M. (1974). The logic of collective action. Harvard University Press showed that associational activity is often more detrimental than favourable for an emerging economy. So we need better ways to break this trust logjam. Trust in the money system in India is comparatively high, as promises tend to be kept with sufficient legal backing and can be digitised with e-mandates or automated payments/ collections; but the same is not the case for goods (or services) ledger, leaving room for delays cascading into a logjam resulting in low trust. This is often felt in day to day life by citizens not getting routine services despite advance payment or small businesses not getting paid despite having supplied goods. Delays, defaults and disputes can become the norm if parties have different versions of the truth.
Every economic activity is thus like a mini-contract with one side on the money ledger (payment from party A to B) and the other side, on the goods/services ledger (from B to A) between counterparties, and can be converted into an electronic contract that automatically executes on both ledgers subject to interoperability. To assure the performance of contracts, the money ledger and the goods/ services ledger need to be connected in a way that is scalable, privacy-enhancing, non-repudiable and programmable. This enables a contract agreed between parties becomes a commitment, and fulfilment is guaranteed by code through the electronic contract. Assuring performance of contracts is critical for a country that is seeking to grow through startup activity, not just in tech but other sectors too.
Currently, litigants lose nearly ₹ 50,000 crores annually in wages or business lost which comes to 0.5% of the country’s GDP, because of litigation, an indication of how expensive litigation can be. The majority of civil disputes in courts are related to recovery of money (30.2 per cent) and land-or property-related matters (29.3 per cent) As reported in the 2016 survey carried out by DAKSH. Common reasons for dispute are different versions of the truth of contracting parties, prior to contract (past) or during the performance of contract (future). Having the same truth and programmability inherent in electronic contracts is a boon in this regard.
In an earlier blog, we have explored the benefits of adapted blockchain technologies to solve the problem of SME financing in India with a related post by global experts7https://balajis.com/add-crypto-to-indiastack/. We build further on that and believe that India can harness recent advances associated with blockchain technology to enable trust between unrelated parties by combining the best of the scalable and centralized legacy world with a secure and private decentralized world. This can benefit the real economy vastly along with the financial world.
Innovations in distributed ledger technologies and BADAL
Distributed Ledger technology can help in two ways – first by being able to verify past performance before one party strikes a deal with another, and second, by being able to enforce a contract in most situations as performance unfolds in future. Thus, building trust about the past as well as the future.
We thus imagine a fabric based on the following basic principles to help create and grow a large number of applications to record economic activity even while reconciling with other activities and past data and help inject a level of trust by creating a reliable, immutable record of trusted data records and programmable contracts
Single platform to allow standards bodies and organisations to publish their schemas, and reuse other schema elements in composing workflows
Fully privacy-preserving capabilities to allow participants to publish relevant zero-knowledge proofs which do not require private data to be shared beyond the participating entities
A programmatic contracts capability that can help automatically carry out the relevant tasks as agreed on without any further manual intervention
By connecting a new digital money ledger (such as Central Bank Digital Currency, or stablecoins) with the new goods & services ledger, we envisage a boost to trust across economy and commerce. As such, BADAL is the first such framework we are aware of globally, uniquely suited to India’s needs, opportunities and strengths.
We have discussed the early version of this in detail in an earlier open-source document8https://github.com/iSPIRT/ppl, called Public Private Ledger. BADAL is thus a privacy supporting, trust enhancing mechanism of coordinating economic activity, and information recording and sharing. Originally this group started out of a process to explore the domain around and figure out the appropriate model to support CBDC, support data sharing between participants, and coordination and automation of event-based standing instructions across events in the goods and services ecosystem and/or money flow.
We then reviewed exciting developments in related areas first to understand their relevance given India’s unique needs. Blockchain technologies generally are seen to enable unrelated parties to trust each other and transact without depending on a central institution or intermediary. These technology innovations are around three key areas:
Maintaining immutability and integrity of data across the distributed ledgers of parties.
Governance mechanisms, especially for decentralised networks
The programmability of such transactions to allow automatic execution.
Public blockchain technologies like Bitcoin and Ethereum, on the other hand, are based on a philosophy of distrust of centralised institutions like Central Banks and are designed for unrestricted access and decentralised decision-making. But they have had to develop new approaches to contend with a few challenges, especially given the huge growth off late that see further wor:
The enormous consumption of resources to establish ‘proof of work’ that limits efficiency and scalability, leading to newer approaches
Exposing all transactions on these networks that generally do not allow sensitive data to be private on the key layer, is as critical for confidential business data as it is for personal data
Rise of many networks that are not interoperable with each other or with the mainstream economy, though some bridges do exist
May have ability to operate outside banking conduits and regulatory frameworks that challenges government’s sovereignty and financial stability through greater oversight has been coming recently
Research on amending throughput, reducing costs and enhancing privacy/auditability/KYC compliance has been ongoing at a rapid pace, especially over the last couple of years.
Despite these unresolved issues, Public blockchain-based tokens, so-called cryptocurrencies, NFTs etc have become an unregulated asset class, especially amongst the young rapidly given the ease of use, creating concerns on possible misuse as well as potential opportunities. We were also part of the recent consultation of the Parliamentary Committee on Finance on ‘Cryptoassets: Opportunities and Challenges’ and had shared with them some of our ideas above in our submission here9https://docs.google.com/document/d/e/2PACX-1vShkuTno_bSILFZPf-Cb_KNwwgM6A_6OgyRiASNS0tXB3ViriHztovrkL7sebiAC7O54y0uwQheTdin/pub.
Various solutions have been employed to address some of these challenges:
Permissioned blockchains, such as Hyperledger Fabric and Corda, allow only trusted parties to participate. Corda uses Notaries for verifying transactions. Such solutions have been successfully used in finance, supply chain, property rights, healthcare, education and e-governance
Zero-knowledge Proofs (ZKPs) allow proving/verification of specific aspects of data without actually making the data public
BADAL builds on the above primitives and is offered as an open and interoperable platform to enable money ledgers such as CBDC/stablecoin along with applications relevant for finance and commerce. This can be designed as a permissioned network relying upon a few regulated entities, and interoperable to ensure that its benefits are widespread and at much lower costs than permissionless systems. It consists of a private ledger that holds sensitive user data withaccess restricted to participating entities only, and a public ledger that contains notarised zero-knowledge proofs about transactions between users. It supports different schemas (configurations) that enable usage across different use-cases.
This programmability coupled with immutability akin to electronic contracts, allows applications in BADAL to be used to leapfrog the trust logjam, without diluting sovereign privileges of control of money given India’s stage of development. BADAL will thus establish provenance that helps establish credibility and reputation of transacting parties, proof of title/ownership of goods and assets, proof of the history of transactions including promises made and ambiguously defined and fulfilled; automatic execution of terms of contracts along with privacy as a fundamental right.
Historically, monetary accounting has solved for only one side of this metaphorical coin- the monetary value. All monetary systems denote a money value to any transfer of goods or services. BADAL, being a ledger that can record value in any domain, solves for the non-monetary aspect of the transaction. Integrated with electronic contracts for a variety of applications, BADAL will enable digital claims on non-monetary assets, including new age asset classes such as crypto assets, NFTs, where claims can be financialized and liquidated. An inherent promissory layer can be enabled into the current transaction mechanism. This extends to all data types, from land records to hospital quality service quality etc, rather than just transactions involving money and goods/ services.
The ability to connect any of the data types across domains can give rise to massive amount of efficiency gains with automated execution thanks to new data from machines like cars, consumer durables like refrigerators or health wearables coming from advances in IoT (Internet of Things), 5G, Imagine a use case of automated crop insurance with sensors that monitor weather from a satellite in space to moisture in soil etc. and deliver claim benefit to the farmer with zero friction in real-time.
One of the biggest problems BADAL could solve at bottom of the pyramid is financial inclusion in India. This is not only in the form of increased monetary transactions through it, but also the ability for MSME’s to gain cheaper credit. This is a possibility as MSME’s will find it easier to prove their liquidity and income to banks and other lenders due to the monetary traceability the system will provide. An increased ability to prove financial stability will lead to greater leverage for borrowers and more systemic trust for lenders. This increase in the systemic trust will not only lead to an increase in credit creation but catalyse an increase in money velocity in India as a whole.
In a subsequent blog post, we will detail the potential use cases; as well as preliminary design of a prototype of one sample use case that is being built currently.
BADAL fabric supporting India Stack could boost digital India
India has pioneered transformations in Identity, Payments, and Data empowerment (these building blocks are popularly called the India Stack) through a techno-legal approach. These address friction of doing business, information asymmetry, and distributed systems. Breakthroughs along the way were public platform (identity), public protocols and standards, and techno-legal approaches to solving big societal problems.
The recent launch of the Account Aggregator (AA) model (based on Data Empowerment and Protection Architecture, DEPA) allows the controlled sharing of private financial data by citizens with various financial institutions to get the best deals. This is a global first and in some sense, an export of a truly global standard12https://twitter.com/Product_nation/status/1435997280692158464?s=20 from India.
Open Credit Enablement Network (OCEN) is creating a way to democratise access to credit, to the level of making it accessible to a street vendor for small sums. These public goods prevent any large player from monopolising the data ecosystem and at the same time reduce the cost of providing service. For instance, microloans as small as Rs.300 can be availed on GeM-SAHAY leading to true inclusion at the bottom of the pyramid.
These techno-regulatory concepts are now being considered for adoption by several countries across the world. Overall, India is arguably ahead of most countries in adopting technology for promoting financial inclusion as well13https://www.bis.org/publ/bppdf/bispap106.pdf.
Image Courtesy: Ananya Phadke
The next building block now is the trust layer through BADAL, ensuring every commitment is met and every contract is enforceable, boosting transparency and growth over the next decade. Trust permeates through all three ends of this triangle as identity is the ‘who’; and data and payment relate to ‘what’ of commerce. In BADAL, identity and data sharing can be achieved without diluting privacy to enable trusted payments (& commerce).
Annexure: CBDC Developments
While BADAL provides fabric to money or goods ledgers, we describe CBDC in detail here, given its importance. Money was traditionally issued by the sovereign (through a Central Banker) and circulated in the economy through layers of banking intermediaries. With the advent of permissionless public blockchains, some of which also seek to portray themselves as alternate currencies, the sovereigns have taken note and introduced their own variant as a public good to protect the financial stability of the nation-states. This sovereign/state-issued digital currency is popularly known as Central Bank Digital Currency (CBDC).
While there are different types of CBDCs such as wholesale/ retail and account-based/ token-based, ultimately a payment using CBDC can be immediately settled. This is akin to using paper money and unlike a cheque or money transfer between bank accounts that require a process of clearing and settlement adding to inefficiency and costs. CBDC can potentially thus leapfrog depending upon the development of existing banking systems in different countries.
Advanced Economies (AEs) and Emerging Markets and Developing Economies (EMDEs) have different motivations for issuing CBDC to end-users (via Retail CBDC) and financial institutions (via Wholesale CBDC), illustrated in the diagram below.
In the USA, payments are expensive due to its legacy system of banking. This has led to a burst of digital payment options, the latest being ‘stablecoin assets’ (digital currencies backed by real assets like US dollar, treasuries, etc) that also compete with their money-market funds. Stablecoin assets have crossed $100 billion25https://www.statista.com/statistics/1255835/stablecoin-market-capitalization/ in market value and are a popular choice to transact in Decentralised Finance (DeFI). DeFi is a parallel financial system evolving around crypto-assets. DeFI is not subject to transparency and compliance required in the conventional financial world at this point in time. As DeFi becomes big and interacts with the conventional financial world, there is a growing systemic risk arising from failure or fraud in DeFi. The US Government, therefore, wants to regulate some aspects of DeFI26https://www.federalreserve.gov/monetarypolicy/fomcminutes20210728.htm and may thereby bless some stablecoins and crypto-assets as explicitly permitted financial products. Earlier in 2015, Bitcoin was determined to be a commodity27https://www.cftc.gov/sites/default/files/2019-12/oceo_bitcoinbasics0218.pdf by some authorities there. The US Fed has also begun a consultation process towards design choices and feasibility of CBDC implementation.
Indian perspective
In India, the focus of policy has rightly been on promoting financial inclusion to formalise the economy and drive economic growth. One important factor which drives the usage of unregulated informal value transfer systems is the lack of banking facilities and corresponding amenities for managing money, which leaves rural communities without alternatives other than a person-to-person method of transferring monetary value. Even though India has seen a significant increase in the number of bank accounts created, Reserve bank data still highlights little improvement in account usage and institutional borrowings, which feeds into the broader issue of financial inclusivity.
Initiatives like Pradhan Mantri Jan-Dhan Yojana (PMJDY) opened doors to big change. UPI has been very successful as a payment mode but still needs underlying bank accounts to transact and thus depends on the banking system & its motivation to provide access to the poor. The PMJDY scheme announced in 2014 has increased the number of adults with bank accounts to 43.47cr 28Progress Report as on 22-Sep-21, PMJDY, MOF, GOI, https://pmjdy.gov.in/account (~46% of 93.55cr adults with an Aadhaar29https://uidai.gov.in/images/Saturation_Report_State-UT_Agewise_31-08-2021.pdf). Despite this headway, there is still a lot to be achieved. The Financial Inclusion Index (FI) recently launched by RBI shows that India is at 53.9 on March 21 (vs 43.4 in March 2017) – a little more than halfway towards complete financial inclusion (FI of 100)30https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52068. Presently, the banking system acts as the main gateway to financial inclusion as the banking system is the main distributor of cash. Hence, various government programmes (like PMJDY) rely upon banks for financial inclusion, despite those being not remunerative for banks. The accounts also have various restrictions on the number of debits/withdrawals to ensure low cost.
Even with the existence of such low-cost bank accounts, the poor do not have an incentive to use a bank account regularly as they do not save enough to use the bank account as a store of value. They use these accounts mainly to collect remittances and withdraw cash at ATMs as bulk of their transactions is in cash, not leaving a visible money trail that in turn makes financial inclusion difficult. Cash in circulation in India even now is Rs 29.38 trillion31https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52274 (~14.9% of estimated GDP for 2020-2132http://mospi.nic.in/sites/default/files/press_releases_statements/Statement_12_1st+September+2021.xls) despite the availability of these cheaper accounts, demonetisation in 2017 and the subsequent formalisation of the economy with GST, RERA, etc.
In addition, the cost of handling cash by the central bank and commercial banks (currency printing, operating currency chests, logistics of moving currency, ATM operations, etc.) has been estimated to be ~Rs 21,000 cr (Rama Bijapurkar) and ~1.7% of GDP ( (Visa Inc., 2016). High adoption of CBDC can help in reducing this cost while creating enormous amounts of data and enabling policymakers to diagnose and regulate better. At a later stage, CBDC can also be used for targeted monetary policy actions when its impact on the financial system is well understood. Experts are concerned that CBDC may result in the disintermediation of the financial system. This risk can be mitigated by following design principles set out by the Bank for International Settlements (BIS)33https://www.bis.org/press/p201009.htm (i) “do no harm” to monetary and financial stability; (ii) coexist with cash and other types of money in a flexible and innovative payment ecosystem; and (iii) promote broader innovation and efficiency.
CBDC inherently provides an alternative to cash to directly reach a customer and can complement the banking network to make adoption quicker. By providing a digital alternative to cash will enable building verifiable money trails that can lead to greater financial inclusion by private players providing customised health, insurance, investment & education products in compliance with privacy laws. In the financially excluded segments, CBDC, being a form of central bank currency, is likely to be well trusted and be adopted easily.
The blog post is co-authored by Sanjay Phadke, Dhananjay Nene, Sharad Sharma, Navin Kabra, R Barve, K Babel, V Agarwal, K Gokarn, Kalyan Narguru, Shashank B, Arun Maharajan, Karan Sirdesai, P Sahu, P Rao, A Kulkarni, Krishna Iyer, V Nene and A Lath.
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