iSPIRT works to transform India into a hub for new generation software products, by addressing crucial government policy, creating market catalysts and grow the maturity of product entrepreneurs. Welcome to the Official Insights!
This 2024 Budget coming post-election has aroused the most curiosity since the budget of 2014. It is for two reasons that this 2024 Budget is significant as we work towards a Product Nation: Reason 1 is for this budget’s Innovation and related public spending on private innovation and Reason 2 is for the next-generation reforms to create a simpler regulatory environment. It is heartening to note that both items are priority areas.
The continuity of the interim budget announcement of 1 lakh crore for private R&D funding is encouraging enough for the startup ecosystem. Under the Vishvamitra initiative, iSPIRT has been pursuing funding at scale for private sector-led R&D and its commercialization. The announcements of funding research in highly sensitive strategic areas such as Small Modular Nuclear Reactors and setting up a 1000 crore venture capital fund for the Space economy have been on our list of initiatives to advocate for and it is heartening to see the Government address R&D investments in geopolitically sensitive areas.
The Finance Minister announced, “We will set up a mechanism for spurring private sector-driven research and innovation at commercial scale with a financing pool of 1 lakh crore.” What and how this mechanism will be set up will be critical for enabling R&D in the country to achieve Viksit Bharat 2047.
Among iSPIRT’s top initiatives is the Stay-in-India checklist,and the request toremove the “Angel Tax” for all classes of investors. The removal of angel tax is the biggest highlight of this budget for the startup ecosystem. The announcement comes after decades of struggle and persuasion. Finally the government has recognised the role of startups in generating employment and has acted in a positive direction.
There is a huge amount of work pending to reform Ease-of-Doing Business (EoDB) if India is to achieve the set objective of Viksit Bharat 2047. The Finance Minister stating an intent to “formulate an Economic Policy Framework” to set the “scope of the next generation of reforms for facilitating employment opportunities and sustaining high growth” perhaps speaks about the government’s thinking on it.
The government’s intention to involve states in ease of doing business (EoDB) efforts is also a very welcome step. We hope the next moves are swift and the government seriously attempts to at least be in the top 10 EoDB destinations globally. This is much needed for MSMEs, Startups, and even to attract FDI in GCCs. The economic survey tabled yesterday also aligns with this thought process.
“We have successfully used technology for improving productivity and bridging inequality in our economy during the past 10 years” said the budget speech. Public investment in Digital Public Infrastructure (DPI) coupled with innovations by the private sector has been a well-accepted norm now. The Government is serious about using the DPI approach in multiple areas, from agriculture to education, etc. The increased penetration of DPI will eventually help digitalization and penetration of software products in the economy.
The budget recognising MSME credit as one big area requiring attention has also called for several actions in this direction. One important step is involving PSU Banks to build their in-house capability to assess MSMEs for credit using an MSME’s digital footprint, instead of relying on external assessment. This will encourage banks to develop cash flow based lending on lines of another initiative of iSPIRT – the Open Credit Enablement Network (OCEN) that focuses on information based collateral lending rather than asset based collateral lending which in turn could help in developing a new credit assessment model that evaluates the digital footprints of MSMEs in the economy.
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.
We are thrilled to announce that Open Credit Enablement Network (OCEN) has been conferred with the prestigious Digidhan 2021-22 award for their Special contribution to the promotion of Digital Payments. The award ceremony was held recently in New Delhi, organized by the Ministry of IT and Electronics, and was handed over to Sagar Parikh, the OCEN lead at iSPIRT, by the Honourable Union Minister, Mr Ashwini Vaishnav.
The Digidhan Awards recognize and celebrate the outstanding contributions made by individuals and organizations towards promoting and adopting digital payments in India. This year, the award was presented to OCEN for their revolutionary work in creating a standardized digital credit infrastructure that enables lending institutions to access and disburse loans digitally.
OCEN‘s platform acts as a bridge between lenders, borrowers, and other credit infrastructure providers, enabling them to interact with each other in a secure, reliable, and efficient manner. With OCEN, borrowers can easily access credit from multiple lenders, while lenders can easily verify the borrower’s identity, creditworthiness, and other relevant details before disbursing the loan.
The platform’s open architecture and standard APIs make integrating with OCEN easy for other credit infrastructure providers, creating a robust credit ecosystem that benefits all stakeholders. Moreover, OCEN’s platform ensures that all transactions are secure, compliant with regulatory requirements, and protect user privacy.
Speaking at the event, Sagar Parikh said, “We are honoured to receive the Digidhan award for our contribution to the promotion of digital payments. At OCEN, we believe that access to credit is a fundamental right, and our platform is designed to ensure that every Indian can access credit securely and efficiently. We are grateful for this recognition and will continue to work towards our mission of financial inclusion for all.”
The Digidhan award is a testament to OCEN’s commitment to promoting financial inclusion and enabling digital transformation in India’s credit ecosystem. The platform’s standardized infrastructure and open architecture have the potential to revolutionize the lending landscape in India, making it easier for borrowers to access credit and for lenders to disburse loans.
We are at the cusp of a data empowerment revolution in India. The DEPA architecture and its first instantiation, the Account Aggregator (AA) framework are empowering individuals and businesses to share their data at low cost and friction, enabling scenarios such as flow-based lending. The Unified Health Interface (UHI) is expected to drive a similar transformation in healthcare.
At the same time, we are acutely aware of the challenges that lurk, none more serious that security and privacy. With the Open Credit Enablement Network (OCEN)/AA framework, for example, a data principal can share their data instantly with many lenders, with no technical guarantees that all lenders will use their data only for the purpose of evaluating the current loan application. The upcoming Personal Data Protection Bill, increased regulation and periodic compliance audits can help detect and deter data abuse. But these measures are not only insufficient in the face of advanced, persistent threats from malicious data consumers, they increase operational costs and limit participation.
We are taking a step towards addressing these challenges by introducing a new privacy construct in Data Empowerment and Protection Architecture (DEPA) called Confidential Clean Rooms. Confidential clean rooms are hardware-protected secure computing environments where sensitive data can be processed while limiting the purpose for which it can be used. For example, lenders can host their business rule engines in confidential clean rooms, and prove to an auditor, regulator, or the consent manager that they cannot access the raw financial data, and the only outcome that they can learn is the loan offer. Confidential clean rooms are based on an emerging technology broadly called confidential computing, which is already supported by major hardware manufacturers such as Intel Corp and AMD and by all major cloud providers, and we expect this technology will mature and be commoditized over the next couple of years.
Today we are announcing the launch of a pilot to evaluate the feasibility and value of confidential clean rooms in the context of OCEN. The pilot is open to lenders, technology services providers and independent software vendors to partner with us over the course of the next year.
Please see the following open house session for more details about partnering with us and indicate your interest using the following forms by 31st of October 2021.
The internet connected the average Indian to millions of sources of information. Could crypto protocols connect Indians to millions of sources of capital?
To achieve its goal of a five trillion dollar economy by 2025, India needs to close an enormous financing gap for its small and medium-size enterprises (SMEs). It already has important assets with which to attract global capital: the youth of its population, the energy of its tech sector, the growth of its internet connectivity, and the rising acceptance of so-called informational collateral in lieu of traditional physical collateral. But what hasn’t yet been done is to integrate these assets into the new multi-trillion dollar cryptoeconomy, which may have the most risk-tolerant, internationally oriented, growth-seeking pool of investors in the world.
In this piece we begin by reviewing India’s need for SME and startup capital. We then tick through India’s existing assets, with particular focus on informational collateral, which combines the previously separate concepts of due diligence and physical collateral into an internet-friendly financing package. Finally, we discuss why global crypto investors could help meet India’s capital needs.
India’s need for SME and startup financing
India is home to more than 60 million businesses, 10 million of which have unique GST registration numbers, most of them SMEs. However, of the one trillion USD worth of total commercial lending exposure of the banking system, only ~25% of it is provided to SMEs, which are considered less creditworthy than larger corporates or multinationals. This has resulted in a financing gap estimated to be between 250-500 billion USD, where meritorious businesses without national profiles aren’t able to access the capital they need to finance their growth. India’s next trillion in GDP growth depends upon solving this problem, but the incumbent financial system may not have the resources to fix it alone. Despite ever-increasing bank branches, India’s legacy financial system is still slow, costly, and unwieldy for borrowers— in sharp contrast to the databases, online KYC systems and intelligent lending apps of new-age fintech companies. And in addition to this high cost of capital for MSMEs, India also has a low baseline level of financial inclusion.
The baseline issue is being partially addressed with low-frill Jan Dhan accounts, which are providing partial banking support for millions of previously excluded individuals. Many of these Jan Dhan accounts are held by small businesses, entrepreneurs, students and self-employed people in rural India, the same folks who are running India’s SMEs. But these accounts have only inflow data, with outflows typically in cash. Even though cash still plays a big role in the self-organized and informal sectors, it’s not easy to provide business-related financing in cash. The so-called JAM trinity (Jan Dhan accounts, Aadhaar digital identities, and Mobile phones) offers a partial solution for this under-banked population, but it only supports what we might think of as consumer-grade applications like basic peer-to-peer payments and individual savings accounts. Access to capital sufficient to finance a business — a true measure of financial inclusion — is still not yet present for these low-income, mostly feature-phone possessing groups.
On the other end of the spectrum from rural SMEs are India’s tech startups. Over the last decade, India has broken into the ranks of global technology and is now the #3 generator of unicorns in the world. Supportive governmental policies, combined with a young, creative, and aspirational workforce has helped reimagine large swathes of the economy including diverse industries such as e-commerce, logistics, SAAS, education, food, healthcare etc. This rise has attracted global equity and loan-funds that could in turn help many start-ups become world beating players in their respective domains. But the startup sector is just as hungry for capital as the rural SMEs, and India’s startup economy is still somewhat disconnected from global venture capitalists and financial markets.
India’s assets: youth, growth, connectivity, and informational collateral
India does have assets with which to close the capital gap. It has a youthful population. It has a fast-growing economy, even given the setbacks of COVID-19. It has an enormous population of hundreds of millions of new internet users. And it has something new, which is the possibility of informational collateral as a sort of combination of traditional concepts of due diligence and physical collateral.
Specifically, the SME funding gap is most pressing for the Indian cash-flow businesses that don’t have the physical assets to take out loans, which are the mainstay of the current, hard-collateral-backed credit system.
One alternative is to use trustworthy digital records to ascertain whether a business is worthy of credit or equity investment. India’s Goods and Services Tax (GST) helps to address this by generating invoice and payment data in a format suitable for credit underwriting and risk analysis. The GST data also enables a small enterprise in a large value system to provide data and visibility across the supply chain; for example, one can track the progress of parts from a small parts supplier to an auto component manufacturer to a large passenger car maker all the way through to distributors, sub-dealers, and retail sales.
The digital version of an SME’s sales and purchase invoices ledger thus amounts to informational collateral on both the company and the larger ecosystem within which it sits, that could become the basis for extending credit, as an alternative to the hard asset or collateral-based financial system. This is similar to how Square Capital and Stripe Capital already function in the West.
In addition to credit-based financing, the trustworthy records furnished by GST’s informational collateral can also support equity or quasi-equity financing, to support growth without increasing debt. These might take the form of direct equity investments in small businesses, or even personal micro-equity investments in individual consultants or students.
India’s innovation: use new pools of crypto capital to address long-standing financing needs
So, we understand that (a) Indian SMEs need capital, and that (b) IndiaStack’s UPI and Aadhaar can help GST generate informational collateral for potential investors and lenders.
Now the question arises: what class of investors is most willing to use this newfangled type of informational collateral to invest in potentially high-risk businesses outside of the proven venues of America, Europe, East Asia and the large Indian enterprises? Who are the most risk-tolerant, international, forward-looking, class of investors in the world — willing to risk millions of dollars purely on the basis of internet diligence alone?
It may turn out to be the new class of wealthy, globally-minded crypto investors. After all, the 10-year old cryptoeconomy is now worth trillions of dollars, there are more than a hundred million crypto holders around the world, and there are at least fifty crypto protocols valued over one billion dollars, a “unicoin” analog to the traditional tech unicorn. While still small in comparison to global capital markets, a sector worth $2T that is growing at more than 100% per annum could become a much larger piece of the global financial puzzle in short order. This is a new source of risk-tolerant digital capital that could flow into India to help close the SME financing gap, if we can make it an attractive proposition for the global investor.
Specifically, India could offer a viable path to deploy this new crypto wealth in a controlled manner, while solving for SME financial inclusion. Inflows of cryptocurrencies from KYC-ed investors through approved Indian and global exchanges can potentially be allowed into India for the purposes of enhancing SME access to low-cost global capital. GST-registered companies could, for instance, receive capital against their issued e-invoices and other information collateral in special accounts opened via a controlled conduit such as GIFT city, which is one of India’s favored bridges to international markets. The companies benefiting will need to explicitly consent to sharing their information and receiving funds into a new account at system-level while capturing cash flows against invoices for repayment. Inflows of global crypto-capital into Indian SMEs could also enable the rest of the credit system to migrate to informational collateral-based lending. And the special account could eventually be ported to a wallet backed by a national digital currency, such as the proposed digital rupee.
For more detail on this possibility, we invite your attention to Balaji S. Srinivasan’s companion piece on the subject, where he proposes to Add Crypto To IndiaStack. Balaji makes the case for crypto-powered extension of IndiaStack, which broadens IndiaStack from its current mostly domestic remit into an international platform for attracting capital from around the world. He describes several case studies by which the emerging world of decentralized finance or “defi” could help enrich the Indian economy, without competing with the digital rupee. For example, Indian startups could benefit from crypto crowdfunding, Indian SMEs as discussed could access global defi lending pools, and Indian students might even be funded with the emerging concept of personal tokens, like an equity-based version of microfinance. As the former CTO of Coinbase, the $100B crypto goliath, and a former General Partner at Andreessen Horowitz, the $16B venture capital firm, Balaji’s proposals have technical and social support from the very class of investors we’d seek to attract. At least insofar as they relate to the issue of plugging the SME financing gap, we believe they deserve serious consideration by policymakers in India.
In short, India has a unique opportunity to close the SME financing gap by attracting the new class of global crypto investors, by using everything the IndiaStack team has helped build over the last decade — particularly UPI, Aadhaar, GST, and the informational collateral they generate — to help connect the trillion-dollar cryptoeconomy to capital-hungry Indian entrepreneurs.
