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OCEN – Next step towards Financial Inclusion in India?

India has a population of 1.3 billion people spread across the length and breadth of the country, with majority living in rural and semi-urban areas. This provides with an untapped market of over 300 million Indians that are currently outside the purview of the formal lending system, due to interrupted flows of capital. 

 

This segment includes MSMEs, gig economy workers, small shop owners, farmers, and other such individuals of unorganized sector. They are struggling to adopt new technology/innovations, invest in R&D and hire skilled workforce due to absence of timely and affordable credit. The situation has further aggravated due to current Covid-19 pandemic, with several such businesses being temporarily or permanently getting shut down due to unavailability to secure liquidity for running their operations.

 

The traditional lenders are unable to provide credit to such businesses/individuals, that need the most. Due to the lack of adequate credit history, these lenders ask for collaterals, which such businesses cannot provide. This hinders the loan disbursal at the right cost of capital, and which meets the requirement of businesses.

 

With several technological/fintech innovations in recent times, it can bring this unorganized sector within the financial loop and bridge the financial divide in India. The recent efforts to promote Digital India, this sector is increasingly generating digital transaction history that can be utilized for providing relevant information and building trust with financial institutions. Using this data along with shifting to cash-based lending (based on future cash flows) from asset-based lending, will help channelizing the credit flow towards this sector.

 

However, there is still lack of appropriately customized, priced, and timed credit facilities in this segment. 

 

Here, Open Credit Enablement Network (“OCEN”) will act as a common language, collaborating lenders and marketplaces to create innovative financial/credit products to scale.

 

 

OCEN Framework – Developing New Lending Ecosystem

 

Open Credit Enablement Network (“OCEN”), launched in July 2020, by IndiaStack, is an open protocol infrastructure designed to standardize and modify the lending process by introducing additional touchpoints (for ex: Digital Platforms) in the lending value chain. 

 

There are primarily four stakeholders involved in OCEN ecosystem. These are:

  1. Loan Service Providers (LSPs): Any digital platform that has an existing customer base and wants to bundle enabling credit with their existing offerings
  2. Technology Service Providers (TSPs): Fintechs that work with LSPs/Lenders, for onboarding onto OCEN infrastructure and provide customized credit solutions
  3. Lenders: Banks/NBFCs
  4. Borrowers: MSMEs or Retail Customers

 

OCEN will act as a mediator for interaction between LSPs and traditional lenders, resulting in providing quick, seamless access to capital to the deserving sector.

 

It will be able to address the below issues in the current lending system: 

  • Identifying the credit worthiness of the borrower
  • Reducing the high cost of borrower acquisition
  • Reducing the turnaround time of loan disbursal
  • Disbursement of loans to small businesses/unorganized sector

 

As said earlier, OCEN is just a protocol. The same must be adopted by LSPs and Lenders in the system to put into practice. This is where Embedded Finance comes into picture and solves this. Embedded Finance is a game changing opportunity for new entrants and Fintechs alike. 

 

OCEN and Embedded Finance will lead to democratization of credit, that will allow other players/digital platforms in the lending value chain to offer credit services by providing low-cost tailored credit solutions.

 

This will evolve and ease lending to MSME sector. The entities closest to borrowers can provide financial services. By leveraging Embedded Finance, they can innovate and provide tailored credit solutions to MSMEs, leading to the growth of the sector.

 

Currently, Lending has very limited application in Embedded Finance, due to the complexity involved in such services. However, with new digital business models having tie up with various Embedded service providers, it has allowed them to provide superior & complex lending products, within OCEN protocol.

 

In brief, the adoption of OCEN in the Embedded Finance structure, will help in driving financial inclusion and the digital lending market that is expected to grow to $100 billion by 2023 (as per Joint Study by Omidyar Network and BCG). 

 

“Just like UPI created a common language between debit and credit and so on, and allowed us to create this huge ecosystem, OCEN protocol also enables that. This is something that is going to have a big impact. For the first time, we can truly democratize credit, and make sure credit reaches all the small companies and street vendors and so on.”

 

Nandan Nilekani, Global FinTech Festival, 2020

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Decentralized Finance: Building a new finance ecosystem for Cryptocurrency in India

With having the highest fintech adoption rate of 87% in emerging markets, as compared to global average of 64% (as per report published by EY & IVCA), India provides huge opportunities for a decentralized banking system to exist. Already being progressively adopted in the US and EU, decentralized finance (DeFi) is expected to take off in India and as well as other Asian markets. It could be a potential market for tapping and expanding into the underbanked/unbanked population in the country. 

 

Decentralized Finance (DeFi) is a financial ecosystem that uses cryptocurrency and blockchain technology for executing financial transactions. In layman’s language, it allows consumers to trade, borrow, transfer, and lend a digital currency, independently of traditional financial institutions and regulatory structures. It eliminates the need for middlemen for transactions.

 

Centralized Finance (CeFi): Present Ecosystem

 

Today, almost every aspect of financial services is managed by centralized systems, operated by governing and regulatory authorities. The consumers need to depend on the financial intermediaries for getting access to almost everything from loans/capital to trading in stocks.

 

As a result, it creates dependency for consumers as they cannot bypass the middlemen like banks, NBFCs, or exchanges, who get a share of income for every financial transaction.

 

 Decentralized Finance: The Future

 

DeFi is unbundling of this centralized financial system, enabling financial services anywhere for anyone, thereby empowering regular people via peer-to-peer exchanges. 

 

DeFi services are built and operate on blockchain technology and cryptocurrency, in a completely secured environment, with no manual intervention. Blockchain is a decentralized and distributed public ledger, where all transactions are recorded in encrypted code. It means that all parties will have access to an identical copy of the ledger that records each transaction in encrypted code. This secures the system by keeping anonymity of sensitive data of the users.

 

Further, all transactions are executed and recorded by parties who use the same blockchain, as there are no middlemen involved for managing the system. It provides users with more control over their money as this ecosystem caters to individual needs.

 

This makes the financial transactions transparent, low-cost, and more secure than the traditional systems employed in CeFi.

 

How to use DeFi?

 

It is powered by decentralized applications or other programs called protocols. Currently, these apps and protocols handle transactions mainly in two cryptocurrencies, Bitcoin and Ethereum (more adaptable than Bitcoin for DeFi). 

 

Some of the current use cases of DeFi apps and protocols include the following:

 

  • Traditional financial transactions
  • Decentralized exchanges (DEXs)
  • E-wallets
  • Stable coins
  • Non-fungible tokens (NFTs): Creating digital assets out of the non-tradeable assets

 

Adoption of DeFi is powered by the omnipresent nature of blockchain. Further, as they exist outside the purview of regulations of governing bodies, thereby increasing their potential benefits.

 

Downsides of DeFi

 

DeFi being a recent innovation, is still not defined by any regulations/rules. Some of the risks involved are:

 

  1. In the absence of any regulation, the user has no protection/recourse in case of any error in executing a transaction
  2. While there is no manual intervention, still the software systems pose a serious risk of being hacked and have potential threat of online data breach

 

DeFi: A Potential Revolution in India

 

DeFi in India can be the new front for Cryptocurrency market, provided the government defines a legal framework for digital currency. It will provide an opportunity to improve the livelihood of people, earlier excluded by traditional institutions by allowing them to engage in financial transactions cheaply and securely. It will provide with additional investment options to investors, through Bitcoin, Ethereum, etc., thereby providing financial independence on how and where to deploy their money.

 

Cryptocurrency has the potential for majority of the population to increase their consumption levels, achieve financial security and contribute to the economic development of the country.

 

Way ahead

 

These alternatives to traditional banking methods are seeing a positive response, predominantly by India’s young population, as they are recognizing the potential benefits that it will offer to the economy if successfully implemented. However, with lack of regulations and lack of necessary infrastructure, it is yet to be seen how it will play out in future.

 

With governments of many countries supporting the same and cryptocurrency market growing rapidly, it is only a matter of time when DeFi will become the new normal. 

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What is PPI? How can a business benefit from PPI?

PPI stands for Prepaid Payment Instrument, PPI is a method that facilitates the purchase of goods and services against the value stored on such instruments. The value stored on such instruments represents the value paid for the holder, by cash, by debit to a bank account, or by credit card.

 

The prepaid instruments can be issued as smart cards, magnetic stripe cards, internet accounts, online wallets, mobile accounts, mobile wallets, paper vouchers, and any such instruments used to access the prepaid amount.

Some of the common examples of PPIs include Paytm and Gpay, gift cards, and debit or credit cards. In today’s piece, we take a look at three types of prepaid payment instruments.

  • Closed System PPIs
  • Semi-Close System PPIs
  • Open system PPIs

Closed System PPIs:

These are PPIs issued by an entity for facilitating the purchase of goods and services from that entity only. No cash withdrawals are permitted. These instruments cannot be used for payment or settlement for third-party services. The issuance and operation of such instruments are not classified as a payment system and do not require approval/authorization from the RBI.

 

Semi-Closed PPIs

These are PPIs issued by banks (approved by RBI) and non-banks (authorized by RBI) for purchase of goods and services, including financial services, remittance facilities, etc., for use at a group of clearly identified merchant locations/establishments which have a specific contract with the issuer (or contract through a payment aggregator/payment gateway) to accept the PPIs as payment instruments. These instruments do not also permit cash withdrawal, irrespective of whether they are issued by banks or non-banks.

 

Open System PPIs

These are PPIs issued by banks (approved by RBI) for use at any merchant for the purchase of goods and services, including financial services, remittance facilities, etc. Cash withdrawal at ATMs / Points of Sale (PoS) terminals / Business Correspondents (BCs) is also allowed through these PPIs.

 

How can a business benefit from PPIs?

 

Prepaid payment instruments in the form of mobile wallets, multipurpose, multicurrency, prepaid cards can accelerate sales, customer loyalty, and profitability. You can earn significant revenue for every transaction made through mobile wallet-enabled prepaid cards you issue.

Businesses must leverage PPIs to tap into the gigantic 760 million smartphone users base in India, who will most likely shop online and pay using mobile apps and wallets.

Using prepaid instruments, you can enable bank-like domestic and cross-border payments, but with greater efficiency, flexibility and security. Armed with the ground-breaking PPI reforms announced by the Reserve Bank of India (RBI), every business in India must ride the PPI wave to reap the utmost benefits.

The following are significant measures announced in the 2021 RBI monetary policy review, applicable from March 31, 2022.

  1.  PPIs can offer Real-Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) facilities to their users.
  2. Interoperability of full KYC PPIs is mandatory.
  3. The maximum balance of mobile wallets doubled to INR 2 lakhs from INR 1 lakh.
  4. Cash withdrawals enabled for full-KYC PPIs of non-bank PPI issuers (in addition to bank issuers)

These reforms have the potential to level the playing field between banks and non-banks, incentivize full KYC PPIs, and drive greater financial inclusion. Businesses that accept payments and remittances through prepaid payment instruments will experience higher customer acquisition, retention, and loyalty, increased customer lifetime value, and long-term profitability.

 

Who can issue PPIs?

 

The following entities can issue PPIs post authorization/approval of RBI.

 

Non- Banking Entities

  • They must be incorporated in India
  • Minimum paid-up capital — more than INR 5 crores
  • Minimum positive net worth — INR 1 crore at all times

NBFCs

  • Maintain an escrow account with any scheduled commercial bank in India

Banks

  • Compliant with PPI eligibility criteria established by the RBI

 

RBI’s new addition to PPI-Small PPIs can have cash upto ₹10,000 loaded per month

The Reserve Bank of India on 27/Aug/2021 issued Master Directions on Prepaid Payment Instruments (PPIs) with the fresh classification of the instruments.

 

“Keeping in view the recent updates to PPI guidelines, it has been decided to issue the Master Directions afresh,” the RBI said.

 

 

No entity can set up and operate payment systems for PPIs without prior approval or authorization of the RBI, it stated.

 

The master directions classify PPIs into two categories – small PPIs and full KYC PPIs. They were earlier classified as closed systems, semi-closed systems, and open system PPIs.

 

“Small PPIs: Issued by banks and non-banks after obtaining minimum details of the PPI holder. They shall be used only for the purchase of goods and services. Funds transfer or cash withdrawal from such PPIs shall not be permitted,” the RBI said.

 

PPI Classification

 

Small PPIs can have cash up to ₹10,000 loaded per month, not exceeding ₹1.2 lakh in a year.

 

Full-KYC PPIs will be issued by banks and non-banks after completing the Know Your Customer (KYC) of the PPI holder.

 

“These PPIs shall be used for the purchase of goods and services, funds transfer or cash withdrawal,” it further said, adding that the amount outstanding should not exceed ₹2 lakhs at any point in time.

 

The RBI has also said that the PPI issuer shall have a board-approved policy for PPI interoperability.

 

Where PPIs are issued in the form of wallets, interoperability across PPIs should be enabled through UPI. Where PPIs are issued in the form of cards (physical or virtual), the cards should be affiliated to the authorized card networks, it said.

 

PPI for mass transit systems should remain exempted from interoperability, while Gift PPI issuers (both banks and non-banks) have the option to offer interoperability.

 

Interoperability shall be mandatory on the acceptance side as well. QR codes in all modes shall be interoperable by March 31, 2022,” it further said.

 

The RBI has also said the PPI issuer shall put in place a formal, publicly disclosed customer grievance redressal framework, including designating a nodal officer to handle customer complaints or grievances, the escalation matrix, and turn-around-times for complaint resolution.

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