OCEN: Understanding the Credit Gap in India and empowering the banking capabilities to MSMEs

1.1 Problem Statement & Understanding the Credit Gap and challenges of MSMEs in India

MSMEs are the most vulnerable segment of our Indian Economy and the formal credit flow journey has been broken for a long time. Lenders find it very difficult to cater these segments of customers due to high distribution and acquisition costs. Their credit needs are also very specific, usually smaller loan amounts, shorter repayment timelines, and quick access to funds.

As per MSME Ministry, India has approximately 6.3 crore MSMEs. They contribute to 30% of India’s GDP. Currently, India’s economy is $2.8 Trillion and in order to reach $5 Trillion, Access to affordable credit MSMEs play a key role in economic growth, job creation and local development, employing around 40% of the workforce.

According to the International Finance Corporation, India’s MSMEs face a credit gap of $400 billion as traditional lenders haven’t been able to deliver credit to the hands of small businesses and individuals who require it the most. As a result of this broken system is a severely underpenetrated credit delivery with only about 11% of the 63 million MSMEs having access to formal credit. The lack of formal data to underwrite MSMEs makes it expensive for financial institutions to identify creditworthy borrowers.

To solve this broken system, OCEN will be a layer between these stakeholders and will standardize the loan disbursal, monitoring, and collection process with help of the data access and digital communications.

1.2 What is OCEN (Open Credit Enablement Network)?

OCEN is an architecture or a protocol incorporating the set of APIs for the interaction between Lenders, Borrowers, Loan service Providers and Account Aggregators.

The core idea of OCEN (pronounced as O-Ken) is to put in place a set of frameworks and protocols that can enable the democratization of credit.

In simple language, OCEN contains the APIs for each step of the lending lifecycle. Digital Platforms can integrate with these APIs and integrate with the lenders seamlessly and digitize the entire lending process and offer loans on their platform.

1.3 Participants & Key Players

OCEN will enable ease of access to credit via digital interactions between these stakeholders-

• Lenders — Lenders are basically the banks/NBFC/Financial Institutions/small finance banks etc. that provide the capital or loan amounts to the prospects.
• Borrowers — Borrowers are typically the MSMEs or individual consumers that are looking forward to borrowing any type of loan.
• Loan Service Providers (LSP) — It is an online intermediaries like marketplaces, e-commerce entities, consumer platforms and digital businesses who are close to the end customers facing digital platforms that sources borrowers. It could be a web app or android app which already has an offering and a customer base and they can augment it by enabling credit on their platform.
• Account Aggregator — They are responsible for accumulating all the available and consented information of the applicant from different financial sources and provide them further to the lenders for better underwriting.
• Technology Service Provider (TSP) — TSPs are basically the fintech companies which offer innovative technologies to LSPs & lenders.

1.4 How does the Architecture function?

OCEN implements a simple protocol incorporating a set of APIs to enable communications between the above mentioned stakeholders.

• Loan Application APIs — A potential borrower or a customer of the LSP wishes to avail a loan amount and files a request. The corresponding LSP then activates the Loan application APIs where the LSP passes all the information of the applicant to the lender.
• Consent APIs — Once the lender has received the request from LSPs, it looks for the credible data for underwriting. The lender(Financial Information User) then reaches out to the Financial Service Provider(FIPs) through a network known as AccountAggregator. The consent APIs are activated for the borrower’s consent post which the relevant information is shared with the lender for underwriting.
• Offer APIs — Once the lender has underwritten the applicant, it shares the loan offers to the LSPs for the borrower through Offer APIs.
• Loan Acceptance APIs — The borrower picks from the available options from different lenders and accepts one through Loan Acceptance API.
• Repayment APIs — Post the loan acceptance, repayment methods are set in between the borrower and the lender using Repayment APIs.

If implemented well, OCEN will disrupt the credit market in India, thereby providing the finance that will help MSMEs grow into SMEs or large corporations. The growth of these micro-enterprises will in turn lead to sustainable job creation and benefit all Indians.