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There is a huge gap between the lending sector and small-scale borrowers in India. The unavailability of finance is one of the major issues the Micro and Small Scale Enterprises (MSMEs) are facing. OCEN has been a buzz-word around. This is a revolutionary technique in the credit world to fulfill the gap between lenders and the marketplace.
What is OCEN?
OCEN is an abbreviation for Open Credit Enablement Network. It is a credit protocol infrastructure that acts as a mediator between lenders and the marketplace. These usually include
Large banks, NBFCs,
OCEN is developed by Indian Software Products Industry Round Table (iSPIRT), a think- tank of the software industry that will democratize the lending ecosystem. OCEN would be a game-changer in the credit functioning of the country. Now more entrepreneurs and small businesses will have access to credit. Venture Capital players, angel investors, high net worth individuals, and private equity can also participate in this exercise as Investors.
How OCEN Works?
For the working, iSpirit is creating a partnership with key leaders in the banking industry such as SBI, Axis Bank, HDFC Bank, ICICI Bank, etc. APIs will be used by account aggregators to embed credit offering and they will be called ‘Loan Service Providers’. This will be important for democratizing access to credit and lowering interest rates for customers.
Why need OCEN?
In India, the cost of lending i.e. interest rates is high. Thus it is unfeasible for small entrepreneurs and small business houses. OCEN creates a platform to connect borrowers with lenders through technology. The credit sector of India is in a bad shape, particularly for small enterprises. They have been in a terrible state for the last few decades. Due to high distribution costs, it is difficult for financial institutions to reach these large segments. Also, the credit requirement of these sectors is different, they need smaller funds, a short repayment timeline, and quick fund access. On the other hand, financial institutions focus on big businesses to offload a larger credit. In India, only 16% of medium and small-scale enterprises have received formal credit while 80% of MSMEs are financed through informal sources. The rate of interest charged from informal sources is very high and it becomes difficult for MSMEs to address the debt burden (Financial Express).
How OCEN solves the problem of Medium and Small Scale Enterprises?
OCEN sets up the infrastructure protocol that enables access to information from various public and private data sources on the basis of consent. And this information connects borrowers with lenders through an affordable credit ecosystem. In this digital age, it is the need of an hour for small enterprises to partner with e-commerce platforms and marketplaces. These marketplaces and e-businesses have collective access to a thousand small businesses’ proprietary digital data that is a valuable source of information. If OCEN is added to the current digital ecosystem, these platforms would become an ideal source for channeling credit to provide financial assistance to the one who needs it.
Who are OCEN’s key market participants and what’s in it for all of them:
OCEN’s key market participants include-
Loan Service Providers
Technology Service Providers
Lenders are the Banks and Financial Institutions that provide credit and their actions will now be streamlined as a result of OCEN protocol. These lenders can now create products as per the needs of small businesses by leveraging the digital infrastructure and getting access to verified data. Lenders will get an opportunity to underwrite loans based on new sets of information.
Loan Service Providers are online intermediaries like marketplaces, consumer platforms, digital business houses, etc. These LSPs can sell credit products as a part of their offering without any significant investment in technology or multiple lender tie-ups. Since these LSPs provide credit to customers they can simultaneously grow their revenue and increase lifetime value to their partners.
Borrowers are the small-scale industries and business houses. These will have access to credit options offered by multiple lenders. The credit process for these borrowers will be completely digital and quick through consent-based data sharing of UPI/Aadhar enabled infrastructure. From typical ‘one size fits all’; financing will shift towards ‘customized’ credit solutions.
Technology service providers will offer innovative data solutions to help lenders. A new set of opportunities is likely to emerge for fintech and other existing players.
How OCEN is expected to be a game-changer in micro-credit facilitation in India?
OCEN has a high potential to improve credit availability for enterprises that are a part of the digital ecosystem. The ‘collateral focused' approach needs to be changed to a ‘cash-flow focused’ approach. Microfinance institutions have already shown tremendous growth through cash-flow funding.
OCEN’s prospect in India
The pilot projects of OCEN include Sahay GST and Sahay GeM(financial express). The former facilitates invoice discounting solutions based on GST and other verified data of the public. The latter is a government e-market platform that will act as an LSP and will facilitate the credit solutions for budding businesses.
With the current technology-driven environment, OCEN has a great responsibility for the future of small businesses and the overall economy. It holds a promise for the future and realizing its full potential OCEN will be highly beneficial to Micro Enterprises.