Digitalising credit systems

Context:

• India has already emerged as a leader when it comes to creating digital public infrastructure and goods that provide development solutions at the population scale.
• For instance, Aadhaar has provided Indians with a foundational identity, the Unified Payments Interface (UPI) has accelerated financial inclusion, and the CoWIN platform has helped drive India’s COVID inoculation programme.
• In April 2022, Aadhaar enrolment reached 1.33 billion, and the number of Aadhaar-based transactions crossed 73.5 billion.

Challenges of traditional lending:

• The lack of ‘expansionability’ of the traditional lenders has created a credit gap of around US $380 billion in the Indian MSME sector.
• Even the credit card industry has not sufficiently been able to penetrate the massive Indian market

• Only 3 percent of the population has a formal credit card today, and this number is largely limited to the country’s tier 1 cities

• Tedious process – Acquiring a loan currently requires lending service providers(LSPs) to shoulder a host of responsibilities.
• These include sourcing, identity verification, underwriting, disbursement, recollections and dispute management.
• Each of these is a process unto itself and their execution impacts the profits earned by an LSP.

Solutions – Open Credit Enablement Networks(OCEN):

• The Open Credit Enablement Network s(OCEN) is an emerging digital public good (DPG) that has the potential to democratise and transform India’s digital lending landscape.
• Designed as a framework of Application Programming Interfaces (APIs), OCEN could be integrated with a wide range of digital platforms and apps
• It aims to empower individuals and micro, small, and medium enterprises (MSMEs) by directly delivering financial products to them, thereby eliminating their dependence on traditional lenders.
• OCEN is being developed by iSPIRT, an Indian software industry think tank, and could be instrumental in building a credit marketplace, or more broadly, a digital ecosystem of lenders and loan service providers (LSPs).

Significance of OECN:

• It automates screening processes to decide on loan-worthy customers and the onboarding of new borrowers.
• The OCEN API can be integrated with e-commerce websites, digital marketplaces, and other apps to help secure a loan while making a purchase.
• OCEN can also be used by non-bank small-scale lenders, thus expanding the scope of lending and borrowing.

• Integrating verification process with Aadhaar’s existing eKYC system.

• In September 2022, 25.25 crore eKYC transactions were done through the platform, raising the total number of transactions to 1,297.93 crore.

• Democratise credit systems by connecting loan providers with customers who are not part of any formalised credit system.

• An example on the iSPIRT website reflects the list of lenders available for a customer.

• Quality of services – A wider adoption of the technology in the marketplace will bring borrowers more diverse and personalised options.
• Overcome limitations of traditional lending: Borrowing money would not be limited to the assets and incomes owned by a person, one of the biggest hurdles that has limited the growth of traditional lending.
• Lending online would reduce the time and cost of loan disbursements and could reflect in more favourable interest rates charged by lenders.

OCEN’s challenges:

• Risk of Non-Performing Assets (NPAs) – Since OCEN will involve credit and a likely increase in the number of borrowers, there may be a probable rise in the incidence of loan defaults.
• Transparency with respect to loan-related data could pose a challenge – With an increase in data, companies will come to possess a list of defaulters who might then be excluded from the lending process.
• Cybersecurity risks such as data breaches may occur.

• Recently, the data of around 110 million users of Mobiwik, a fintech start-up, was sold on the dark web.

• Lack of adequate regulatory frameworks associated with data privacy, confidentiality, and security.

• Lack of technical know-how could lead to online theft and financial fraud.

Suggestions for future:

• Political will to create the confidence necessary for more private players to enter the space and for the technology to be adopted on a wider scale.
• Targeted digital literacy programmes must accompany the rollout of new technologies and platforms.
• Creation of a task force, a system for online dispute resolution and A digital ombudsman.

Way forward

• Fintech is among the fastest growing sectors in India, with start-ups in the space receiving funding worth US$9.8 billion in 2021.
• Around 10 fintech companies have scaled up as unicorns in 2021, and the fintech market is expected to grow to US$ 84 billion by 2025.
• India’s other major instances of DPGs–the Aadhaar and UPI–have experienced massive scale and success and same can be expected for OCEN.

Source: ORF