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.
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.
