Digitalising credit systems

  • IASbaba
  • December 29, 2022
  • 0
Economics, Governance
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  • 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


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