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In the aftermath of the successful implementation of the Unified Payments Interface (UPI), India's financial landscape experienced a remarkable metamorphosis. This digital payment system catalyzed a shift towards a more cashless society, fostering financial inclusion and transforming the ease of transactions. However, beneath this progress lay persisting inefficiencies and disparities within the lending sector that have hindered equitable economic growth.
The Indian banking system has been a critical pillar of the nation's economy, supporting growth and development for decades. However, it has faced numerous challenges that have hindered its effectiveness, especially in serving Micro, Small, and Medium Enterprises (MSMEs) that contribute to an estimated 30% of India’s GDP as of 2022. In addition, the MSME industry has been a key source of employment in India. According to data from the Udyam Registration Portal as of August 2, 2023, there were an amazing 12,36,15,681 people working for MSMEs who had registered between July 1, 2020, and August 1, 2023.
To address the problem at hand, the government announced the launch of a digital infrastructure called Open Credit Enablement Network (OCEN) at the 2020 Global FinTech Festival that aimed to democratize India's small ticket industry. Lenders and borrowers can easily communicate on the same platform thanks to the OCEN API framework. The OCEN framework's objective is to give small businesses access to a transparent credit scoring system and to help lenders acquire customers with fewer resources and lower costs. In recent times, the Open Credit Enablement Network (OCEN) has emerged as a revolutionary initiative aimed at transforming the Indian banking landscape, fostering financial inclusion, and accelerating economic growth. To better understand OCEN’s objective, how it will be implemented and the potential contributions the system will have on India’s economy, we will first set the context of India’s present scenario and the problems OCEN is trying to solve.
2.The Problems in the Indian Banking System
Despite the transformative impact of digital payments like UPI (launched in 2016), India's lending ecosystem continues to grapple with imbalances. A significant segment of India's population, particularly MSMEs, which are pivotal contributors to India's economy(as mentioned above), faces difficulty in accessing formal credit due to restrictive lending practices and insufficient collateral. Paradoxically, certain large corporations have been granted substantial loans, with a few subsequently defaulting on these loans. For instance, recent instances of high-profile defaults have raised concerns about the efficacy of the lending system. This disparity becomes more apparent when considering that a mere fraction of MSMEs are able to access loans compared to larger enterprises.
Despite their significance, a large portion of these enterprises faces obstacles in obtaining credit, leading to underutilized potential, thereby hampering the growth of the economy. The problems of the Indian banking system are namely:
1.Lack of Access: A significant portion of the population, especially in rural areas, remains unbanked or underbanked, with limited access to formal financial services. As of 2021, approximately 190 million Indian adults lacked access to a bank account.
2.Inefficient Lending Processes: Traditional lending processes are often manual, time-consuming, and laden with paperwork, resulting in delays and increased costs. The World Bank reported that it takes an average of 56 days to secure a loan in India, compared to the global average of 22 days.
3.High Non-Performing Assets (NPAs): The Indian banking sector has been grappling with high levels of NPAs, constraining the ability of banks to lend. NPAs accounted for around 7.5% of total bank loans in 2020.
4.Limited MSME Credit: MSMEs, despite being the backbone of the Indian economy, face difficulties in accessing credit due to a lack of credit history and collateral. Around 60% of MSMEs rely on informal sources of credit.
5.Complexity in Collateral Management: Traditional lending practices often require substantial collateral, making it difficult for many individuals and businesses to secure loans. This restricts access to credit for a significant portion of the population.
Introduced as a collaborative effort between governmental bodies, financial institutions, and technology stakeholders, the Open Credit Enablement Network (OCEN) presents itself as a potential panacea to the challenges plaguing India's lending landscape. OCEN's core objectives encompass the simplification of credit evaluation processes, enhancement of transparency, and mitigation of information asymmetry between borrowers and lenders.
Implementation Model and Anticipated Benefits:
Restructuring Banking with OCEN
Operationalized as a technology-driven platform, OCEN collates data from a diverse array of sources, including government databases and financial institutions. This centralized repository empowers lenders to make data-informed credit decisions, particularly for historically underserved segments like MSMEs. By harnessing advanced data analytics and machine learning, OCEN facilitates robust risk assessment and promotes equitable loan disbursal. Furthermore, the model holds the potential to significantly reduce the temporal and financial resources traditionally consumed by credit evaluations.
Timelines and Problems for MSMEs It Solves:
OCEN's development commenced in 2020, with pilot projects scheduled for early 2023. By 2025, OCEN aims to be fully integrated into the Indian financial ecosystem.
It is set to be implemented through the Unified Payments Interface (UPI) system. The timeline for OCEN's integration with UPI spans three phases:
1. Phase 1 - Foundation: Standardization of APIs and protocols for seamless data exchange among banks and financial institutions.
2. Phase 2 - Expansion: Integration of additional financial services and stakeholders, expanding the reach of OCEN.
3. Phase 3 - Innovation: Encouraging fintech firms to develop innovative solutions and services on top of the OCEN infrastructure.
4.How OCEN Empowers MSMEs and thereby India’s economy?
The imminent implementation of OCEN offers a promising array of short-term and long-term benefits. In the immediate future, MSMEs are poised to experience enhanced access to credit, thereby fostering business expansion, amplifying employment opportunities, and bolstering economic growth. Concurrently, the streamlining of the lending process might engender a decline in non-performing assets (NPAs), fostering greater stability within the banking sector. Over the long term, the infusion of credit into hitherto underserved sectors could engender innovation and stimulate economic diversification. It will do so through the following:
Enhanced Credit Access: OCEN enables banks to access a comprehensive credit database, making it easier for MSMEs to secure loans based on their financial history and potential.
Streamlined Lending Processes: Digitalization and standardized protocols reduce the time and effort required for loan approvals, making credit more accessible to MSMEs.
Diversified Financial Services: OCEN's inclusive approach allows MSMEs to explore a wide range of financial services beyond traditional credit, such as insurance and investment products.
Additionally, OCEN will permit lenders to share credit data, enabling lenders to make more thorough lending choices and facilitating borrowers' access to credit.
5.Challenges to foresee
There may be a potential increase in the severity of loan defaults as a result of the inclusion of credit and anticipated growth in the number of borrowers in OCEN!
It could be necessary to establish a task force, an online forum for settling conflicts, and a digital ombudsman in order to remedy this. These procedures will make it possible for additional private businesses to enter the market and broaden the use of the technology.
It can be difficult to make loan data transparent. Businesses will develop a list of defaulters as data volume increases, and these individuals may be disqualified from the lending process.
In order to give potential borrowers the money they need, the lending process must be thorough and every effort must be made.
Paving the Way for Inclusive and Equitable Lending
The Open Credit Enablement Network (OCEN) stands as a potential catalyst for reshaping India's lending paradigm, dismantling barriers to credit access and advancing financial inclusion. The journey towards realizing OCEN's transformative potential is marked by hurdles, but its capacity to revolutionize the banking sector and galvanize economic progress is undeniable. By addressing historical disparities in lending, OCEN paves the way for a more equitable and vibrant financial ecosystem in India.
OCEN holds the potential to revolutionize the Indian banking system, ushering in a new era of financial inclusivity and sustainable economic growth. By addressing the challenges faced by MSMEs, OCEN can empower them to contribute significantly to India's development journey. Its integration with the UPI system presents an exciting opportunity for collaboration among various stakeholders and the realization of a digitally-driven financial ecosystem.
Meet The Thought Leaders
Laboni is a mentor at GGI and is currently working at The Bridgespan Group as an Associate Consultant. She takes keen interest in socioeconomic development issues, public policy, and equity across different vectors of gender, caste, class, and ability, which in turn fuelled her transition from working at a global bank to the social sector. She is an Urban Fellow from the Indian Institute for Human Settlements, Bangalore and has a bachelor's degree in Economics from St. Stephen's College, University of Delhi.
Meet The Authors (GGI Fellows)
Sharanya is working as a market research analyst and business consultant at 4sight Research and Analytics,one of the fastest growing market research firms in the Middle East . I am a recent graduate from O.P. Jindal Global University, holding a Bachelor’s Degree in Economics. I am also distinction diploma holder of the Indian Institution of Governance and Leadership’s International Affair and Diplomacy. I like to travel ,play tennis and listen to music.
If you are interested in applying to GGI's Impact Fellowship program, you can access our application link here.
1. Reserve Bank of India (RBI) Annual Report - www.rbi.org.in
2. Ministry of Finance, Government of India - www.finmin.nic.in
3. The Economic Times - www.economictimes.indiatimes.com
4. OCEN Official Website - www.ocen.org 5. OneNDF-https://www.onendf.com/what-is-ocen-open-credit-enablement-network/
6. Times of India -Underscoring contribution of MSME sector to economic growth of India
7. Ministry of Micro, Small and Medium Enterprises - Annual Report 2020-21- https://msme.gov.in/sites/default/files/Annualrprt2020-21-Eng.pdf
8. World Bank. (2021). "The Global Findex Database 2017." [Online]. Available: https://globalfindex.org/
9. Reserve Bank of India. (2020). "Handbook of Statistics on Indian Economy."- https://www.rbi.org.in/
10. NITI Aayog. (2020). "Unlocking the Potential of Fintech in India." -https://niti.gov.in/
11. Economic Times. (2022). "What is OCEN?"-https://economictimes.indiatimes.com/