Open Credit Enablement Network, a.k.a., OCEN is the new buzzword in the financial lending space. OCEN, launched in July 2020, is an open protocol infrastructure between Loan Service Providers such as e-commerce players and FinTechs and mainstream lenders such as banks and NBFCs.
The OCEN framework aims to put a set of protocols and framework that can provide credit to segments that need it the most.
As per reports, it is expected that the digital lending market will grow to $100 billion by 2023. OCEN is a framework for the interaction between lenders, Loan Service Providers (LSPs), and Account Aggregators (AA).
Challenges in Credit-Based Lending for MSMEs and Lenders
MSMEs and the unorganised sector struggle to invest in technology, enhance infrastructure and upskill the workforce due to lack of timely and affordable credit. The situation has worsened in the current pandemic, with several businesses either shutting down temporarily or permanently or struggling to secure liquid cash for their operations.
The traditional lenders have been unable to guide credit towards businesses that need it. MSMEs need timely working capital but cannot access it from traditional lenders such as banks and NBFCs.
The Problem of Lack of Credit History
Due to a lack of adequate credit history and formal records, lenders ask for collaterals that the entrepreneur cannot provide. This has hampered the credit disbursal to small business at the right cost of capital and which is customised as per their requirement.
The current lending setup makes it cumbersome for banks and NBFCs to give loans to borrowers as they are keen to reduce the risk of NPA. Any innovation is hindered by time and cost constraints in identifying and servicing new consumers, collecting documents and processing payments.
Banks have the lowest cost of capital due to deposits and accounts of the public, while they tend to lend to larger enterprises who have a higher ticket size requirement. Smaller enterprises that make up a larger portion of the working economy are unable to often provide necessary data or collateral to banks. In the absence of this, they cannot avail of loans even though they most need the loan. They must depend on lenders who charge higher interest to compensate for the higher cost of capital and riskier customer base.
The majority of the MSMEs tend to gravitate towards NBFCs for their loan requirements even though they charge a higher interest rate than banks. There are several reasons for this:
- Personalised attention,
- Collection of documents in one go,
- Shorter process time, and
- An enhanced customer experience.
Asset-based vs. Cash-based Lending
Complex documentation and repeated visits to the bank branch are considered another major hurdle for entrepreneurs accessing fiancé from the banks. Several instances of underfinancing have been found where banks had sanctioned less credit than required, forcing entrepreneurs to meet the credit gap through the NBFCs.
Instead of asset-based lending, cash-based lending can help promote the credit flow towards MSMEs. This model of extending credit is reliant on projected cash flows instead of assets. Therefore, traditional lenders can partner with fintech’s to lend to MSMEs through cash flow-based lending and reduce the risk of NPA.
How OCEN Can Help in Loan Disbursement to MSMEs
There is an expected customer base of nearly 300 million Indians who have not been tapped by the formal credit lenders, the banks and the NBFCs.
As we are inching towards more and more digitalisation in every sphere, there are several newly digitised users such as gig economy workers, entrepreneurs of MSMEs, small shop owners, rural self-help groups, farmers, and traders. They are generating a digital transaction history that can be used to inform and build trust with lenders. However, there is still a lack of credit facilities that are customised as per needs.
Here, OCEN can act as a common language, connecting lenders and mediators to create innovative financial products that can be scaled.
OCEN Framework in Cash-flow Based Lending
MSMEs can benefit from the new developing ecosystem that provides seamless access to capital and eases the rigours of business. With OCEN, the vision is to enable a digitised credit infrastructure that standardises the loan application process and makes it quick and hassle-free at both ends. A uniform system for lenders will help them offer small-ticket loans to deserving MSMEs.
OCEN can enable banks to co-lend with NBFCs and extend capital to MSMEs. With NBFCs as the primary interface for the borrower, banks can benefit from greater outreach, technical capabilities and operational expertise of NBFCs as they can ensure last-mile connectivity. Thus, banks can serve a larger customer base without having to bear heavy operational costs. This lending system can benefit NBFCs as they are currently faced with a liquidity crunch, can serve better with financial backup from larger banks.
This conjunction of lending scenario is an enabler of digital lending for borrowers who can make use of credit disbursal processes that are faster and quicker. In addition, the digital interface allows to cater to small -businesses even in far-flung areas and create a win-win situation for both.
OCEN is expected to address several issues such as
- Identifying the creditworthiness of the borrowers
- Reducing the high cost of borrower acquisition
- Ease of connecting customers with lenders
- Reducing the high turnaround time of loan disbursal
- Creating customised financial products as per need
- Extending credit to small scale and unorganised biz owner
To sum up
OCEN is the way ahead, a solution for the need for credit and a problem to credit distribution need. It cannot bring more credit into the system but can make it easier for MSMEs to access it and reduce the concentration of the capital in the pockets of a few.
At Finezza, we offer a range of fintech solutions for banks, NBFCs and other institutes, from loan origination system to AA integration. Get in touch with us to adopt a loan management system with account aggregator integration, and experience the possibilities of OCEN.