Can OCEN Be to Lending What UPI Has Become to Payments in India?

OCEN hails a new generation of the India Stack — a framework that made innovations like UPI, DigiLocker, and Aadhar possible.

OCEN, or Open Credit Enablement Network, is the new digitisation boom facing India’s financial lending sector. The framework (pronounced ‘O-Ken’) is an open protocol infrastructure that connects Loan Service Providers including e-commerce, MSME, and FinTechs with traditional lenders like banks and NBFCs.

It took effect in July 2020 overlooking the nation’s largely unregulated sector and an untapped base of 300 million Indians who have no access to formal lending.

Like UPI did to India’s digital payments, the OCEN framework intends to create guidelines and a structure to offer credit to sectors that most need it, especially the MSME. 

OCEN and UPI: A Closer Look

In 2020, India processed over 1.3 billion UPI transactions. Every UPI transaction followed the same exact sequence across 150 banks and hundreds of mobile apps. All apps asked for the same set of user inputs, displayed the same screens, used the same PIN to authenticate, and displayed the same messages. 

Unifying is what UPI did to India’s online payments interface, and OCEN seeks to do the same to India’s lending sector and more. 

The difference is – UPI takes care of digital payments, whilst OCEN seeks to unify the digital lending sector. OCEN dramatically simplifies lending while UPI simplifies digital payments. 

According to predictions, the digital lending business will reach $100 billion by 2023. Loan Service Providers, Lenders, and Account Aggregators interact under the OCEN framework.

So what issue is OCEN solving?

The Problem

The Indian financial services sector is now moving forward with the next stage of digitisation following the incredible success of the Unified Payments Interface (UPI) mobile payments platform.

In addition to the opportunities, there are many challenges as well. For example, due to a growing NPA burden, most Indian lenders have diverted their attention to underfunded SME and microfinance projects.

The lack of real-time credit data, however, prevents lenders from realising its true potential. So, can OCEN be to lending what UPI has become to payments in India? Let’s explore.

Solution: the Rise of OCEN

A credit gap in the range of $270 to $330 billion is supposed to exist in the MSME sector. Furthermore, the cost of financing is too high for small-value loans to be practicable, leaving most small and mid-sized firms out.

The MSME is a unique sector in India but is often said to be in the ‘Lost Middle,’ since their specific needs fall between microcredit organisations such as Micro-Finance Institutions (MFINs) and banks, putting them vulnerable to secondary lending businesses that demand exorbitant interest rates and occasionally deceive.

Under the Open Credit Enablement Network (OCEN) programme, a standard credit information architecture enables to connect lenders, customers, and merchants to address this problem.

OCEN means:

O: Open – A credit scheme that is open to anyone.

CE: Loans Enablement – To help neglected MSME businesses get credit.

N: Network – A network of lenders, borrowers, and account collectors benefit from this lending.

Here’s how OCEN helps financial institutions meet their goals for the next level of growth:

Improving asset quality

To put it simply, OCEN is what UPI was to mobile payments.

The protocol will allow the transfer of consumers’ financial information from the point of purchase to financial institutions via dedicated data aggregators with real-time consent from the consumer. 

Consequently, lenders will close the gap in loan origination, resulting in customers getting the most competitive quotes.

Moreover, OCEN will run on an inherently secure platform and comply with the strict data protection regulations under the Personal Data Protection Bill, which was at the heart of the 2019 parliamentary debate.

An Established Technological Foundation

OCEN creates a new generation of the India Stack —  a framework that has already made innovations such as UPI, DigiLocker, and Aadhar possible. 

Lenders will now have access to customer credit information through NBFCs that serve as gatekeepers of credit data.

Data will be sourced from Account Aggregators (AAs) integrating traditional and nontraditional credit data sources.

By using OCEN, banks can monitor borrowers spending habits and respond if there are signs of financial trouble. 

Through this system, a merchant will act as a frontline loan provider. Aggregators and lenders will partner with them. The data on consumer spending activity such as utility payments and taxes will help for the first time in loan underwriting. Credit bureaus currently do not include this data in their reports. 

As a result, lenders will judge risk more effectively and improve asset quality over time.

The Democratisation of Consumer Credit Information

Economic growth has declined at a record pace since the Coronavirus pandemic began. As a result, lenders have been trying to control the cost of credit as retail and business finance demand has stalled.

Through OCEN, lenders can acquire credit data, as well as market intelligence, more efficiently. In addition, the changes will democratise credit data access across the loan value chain. In this way, lenders can predict macroeconomic trends and produce targeted products to meet emerging market demands.

Lenders operate in a strict regulatory environment. The RBI has suspended numerous Non-Banking Financial Companies (NBFCs) that failed to meet licensing standards and violated the regulations. 

In the upcoming Personal Data Protection Bill, penalties for violations range between INR 5 crores and 15 crores. 

In an uncertain business environment, the stakes are higher for banks and private lenders. With standardised credit information, lenders can be more proactive about risk management and compliance. A standardised data will also simplify, if not eliminate, back-office processing requirements, which currently drive up lending costs.

Can OCEN API be a saviour?

With the unified API of Open Credit Network, lenders can easily share data with merchants and loan service providers, thereby improving turnaround time.

In turn, this will result in a better customer experience. In addition to automated processes, lenders now have unimaginable cost efficiencies with traditional approaches. A better understanding of OCEN can lead to more effective risk models in the future.

Resolving existing gaps

These are the ways OCEN is dissolving the existing gaps and helping the Fintech industry:

  • In diverse domains, OCEN makes for the perfect test case. Brazil, for example, is already monitoring its real-world impact with great interest. 
  • The confluence of e-KYC, online documentation, and instant credit check built into India Stack will improve efficiencies, reduce costs, and enable margin improvement.
  • A customer-centric business model is essential for lenders as they adapt to the era of open banking. The goal is to give customers more control over their bank accounts and investments. 
  • With the advent of loan marketplaces, large banks are using data analytics to process pre-approval loans instantly. 
  • Most lenders could approve such loans around the clock while maintaining compliance with credit guidelines with OCEN.
  • OCEN makes it easier for smaller NBFCs to identify new market opportunities, especially in Small, Medium, and Micro Enterprises.

However, the only prerequisite for using the new protocol is a loan management system that supports the OCEN API. While most Indian lenders have embraced technology, the quality of credit data has been an issue.

How can OCEN help in loan disbursement?

A new developing ecosystem can help MSMEs access capital and ease business rigours. The vision of OCEN is to transform the credit application process into a digitised one for quick and hassle-free transactions. 

MSMEs deserving of small-ticket loans will benefit from a uniform system for lenders. Moreover, a lender can offer co-lending to NBFCs and MSMEs with the help of OCEN. 

As the primary interface with the borrower, NBFCs can provide improved outreach, technical expertise, and operational support to banks, ensuring full service. As a result, banks can serve a broader customer base without having to incur high operating costs. 

In addition, NBFCs that face a liquidity crisis can benefit from a lending system that allows banks to provide financial backing. Creating an interface that caters to small -businesses even in remote areas creates a win-win situation for both.

The Indian financial technology and data analytics industries are among the most promising in the world. However, Indians are still heavily reliant on informal lending sources, and the vast majority lack access to credit. 

Business opportunities abound in every sector, from farms to small traders. OCEN improves the integration of marketplaces and lenders. Due to the exponential increase in lending channels, lenders must adapt and grow partnerships to develop innovative products.

GLAAS’s API can now integrate into your business products, and you can rest assured all the nuances around lenders will be taken care of.

Built on a comprehensive embedded finance platform, it provides insight at every stage of the credit value chain. It aims to reduce costs, optimise processes, and enhance decision-making seamlessly and sustainably for our customers. 

In a bird’s eye view, OCEN will address the following: 

  • Identifying the creditworthy borrowers 
  • High acquisition costs
  • Cumbersome custom integrations and manual processes to connect customers with lenders.
  • High turnaround time for customer loans
  • Obstacles to unique financial product introduction
  • Lack of credit for MSMEs in India where only 11% of 63 million MSMEs have official loans.

To know more about GLAAS, get in touch with us.

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