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