A few large lenders will launch a new lending platform, based on the Open Credit Enablement Network (OCEN) protocol for micro-small-medium-enterprises (MSMEs), in the next one or two months, a senior executive aware of OCEN’s development told MediaNama. Developed by the Bengaluru-based software products think-tank iSPIRT Foundation, OCEN is essentially a common set of application programme interfaces (APIs) that lenders and third-party apps can use to deliver loans digitally to MSMEs across the country. Much like UPI is a ‘payments rail’, OCEN is a ‘credit rail’.

OCEN will ‘democratise credit’: Earlier this year, Infosys co-founder and non-executive chairman Nandan Nilekani had announced the development of a new lending tool called ‘OCEN’, which would serve as a “common language” for lenders and borrowers, and would have a “dramatic impact” on how small businesses get loans. It is a means to “democratise credit” in a world where lenders are not able lend to small businesses due to high costs and data asymmetry, he said.

“OCEN is a set of plumbing standards for fintechs and banks to interact with each other and standardises the communication between these financial entities, particularly for MSMEs that have been traditionally ignored by the formal financial system. The aim of this new type of lending system is to ensure that sub-prime and mid-prime MSME borrowers can get financing against their invoices,” the senior executive quoted above said.

MediaNama has reached out to iSPIRT for comments. Their responses will be added when received.

Reshaping the existing ecosystem

OCEN is an attempt by the software think-tank to reshape the lending ecosystem as it exists today in the country, as loan applications will get standardised and borrowers can avail short-term and small-sized loans through a few clicks on an app. While banks and non-bank lenders have a large base of MSME borrowers, the penetration of formal credit among these borrowers is still fairly low. Therefore, OCEN is aimed at opening up the ecosystem by allowing non-financial players to also deliver loans. Any lender or third-party service provider on OCEN would be termed as “loan service providers (LSP)” under OCEN, much like there are payment service provides (PSPs) in the digital payments ecosystem.

In a July 31 presentation, Nipun Kohli, a volunteer with iSPIRT said that traditional lenders have been operating in a ‘lend and forget’ world as they do not have periodic access to the borrowers’ data. “[Under OCEN], since the LSP will be part of the transaction, there will be a high data touch and the biggest difference here is that now there will be an understanding of erratic and variable cash flows, and build different financial products,” he said.

Today, most banks and non-bank lenders have bi-lateral relations with third-party loan marketplace websites which help borrowers identify loan offers and help lenders acquire new customers. In an OCEN world, these bi-lateral ties may undergo a change as lenders would be able to market loans to MSME borrowers through multiple LSPs.

Gradually, as the OCEN ecosystem stabilises and gains momentum there will be transition in a phased manner, says Deepak Sharma, president and chief digital officer at Kotak Mahindra Bank. “In the short-term it’s not like everything will shift to OCEN, I see both [bi-lateral partnerships and OCEN] co-existing for some time till this [OCEN] becomes the standard. It is not going to become a zero-sum game,” he told MediaNama. “The whole ecosystem in UPI for example has been building new use-cases on top of payments. Similarly, the lending ecosystem will grow through OCEN and players will need to build more products and use-cases on top,” he added.

According to Madhusudanan R, co-founder at Yap, an API infrastructure player that works with banks, it will take some time for OCEN to be fully executed since it relies on two distinct pillars — the Account Aggregator (AA) framework, and LSPs’ readiness for API integration. “While it has been referred to as the next UPI, the UPI had a very strong body like the NPCI (National Payments Corporation of India) which was able to rally behind everyone to get things done. While we are actively invested in it, it is still at a very nascent stage,” he told MediaNama.

Challenges going forward

While iSPIRT has released APIs for OCEN, multiple technology integrations by a wide range of stakeholders need to take place for the system to be rolled out. Some of these stakeholders are already in various stages of experimenting and integrating the OCEN lending protocol into their systems. Other entities will have to brought into the ecosystem. The stakeholders include:

1. Lenders
2. Credit bureaus
3. UPI players
4. Account Aggregators (AA)
5. Loan Service Providers (LSP)
6. Derived data providers
7. Technology providers
8. Underwriting providers

A fundamental aspect of OCEN is the use of cash-flow data of MSMEs to underwrite loans. While lenders will provide loans against invoices that an MSME receives for instance, it can also use tax data as a source to map borrowers’ cash-flows. This means that government authorities like the Goods and Services Tax Network (GSTN) would also need to provide APIs to the LSPs and the wider OCEN ecosystem. Further, if lenders wish to use digital payments data flowing through UPI, Bharat Bill Payments, FASTag or other platforms, as part of their underwriting efforts, the NPCI or the various third-party payments apps may also need to be part of OCEN system.

Another crucial aspect of the OCEN protocol involves the AA system, as it will provide lenders with access to banking and financial information of MSME borrowers through an entirely digital mechanism. But this system, which was developed last year to enable easy sharing of official documents and information of borrowers between financial institutions, is still under development.

While fintech payment companies and fintech lenders that do not have a license from the RBI are indirectly regulated through the NPCI or their banking partners, respectively, LSPs may also need a regulation framework. Though AAs are data providers and are not lenders, they are regulated by the RBI.

Since the LSPs are only providing a consent link to the borrower to send data to the lenderand they do not store or collect data themselves there is no immediate need to regulate LSPs, the senior executive aware of OCEN’s development said. “However, in due course as the system matures in the next few years regulations will come into place to address various issues like grievance redressal and data protection,” this person added.

For instance, the executive explained, a food delivery platform can be both an LSP offering loans to its restaurant partners, and a derived data provider under OCEN as it will provide data to lenders. While the data part of this platform will be regulated under specific data regulations, the LSP part of the platform will need to be regulated separately as it reaches scale, this person said.

What do the bankers think?

A senior banker told MediaNama that if banks treat OCEN like another distribution mechanism, like they do with sales agents, it can indeed be successful. “When UPI started, none of the banks thought that three non-bank entities would have a 90% market share. But the challenge here is the incentive structure, particularly in terms of how will the borrower-facing LSP make money? Who will spend the most on popularising the system through marketing? How will each player in the value-chain be incentivised?” the banker said, on the condition of anonymity.

At present, Deepak Sharma of Kotak and the senior banker quoted above said that they are testing the system and working with the APIs that are now publicly available.

Sharma said, “We are looking at the types of small and unsecured loans we can provide through this system, understanding the potential customers that will come to it, the kind of data we will get to build a real-time underwriting framework, how to manage risk, ensure there is no double financing to the same borrower, in addition to Know-Your-Customer (KYC), documentation, e-sign and other moving parts.”

However, some of the top banks are hesitant to integrate OCEN in their systems because they have spent countless hours and large amounts of money on building technology solutions and credit underwriting models using cash-flow based data, an executive with a technology company that works with banks told MediaNama. “Some of the top banks have ensured that their borrowers stick with them by ring-fencing them for all lending and payments services. OCEN could disrupt the banks’ hold on their borrowers since the customer can now take loans from anyone else,” this person said on the condition of anonymity.

How OCEN will work:

  • The borrower registers and authenticates their account against their GST Identity Number on a payment or bank application, or credit marketplace or LSP application and creates an account
  • The OCEN APIs will map the borrowers’ cash-flows
  • This information is then shared, through the Account Aggregator system, with lenders
  • Link credit bureau score, GST information and bank accounts with the AA provider
  • Information is then passed on to lenders, who will underwrite offers for the borrower
  • Select a loan offer, from multiple lenders; for example, against a particular GST invoice
  • Consent to a particular offer and authorise the loan agreement
  • Funds are then deposited to the bank account, which was registered with the AA system
  • Borrower links their UPI ID to enable automatic loan repayments under the e-mandate facility
  • Additionally, the AA provider would ask for the borrowers’ consent to allow the lender to actively monitor the borrowers’ bank account for the term of the loan
  • Once the application is submitted and approved, the loan would be disbursed