‘The idea is to get credit to everybody’

Addressing the Global Fintech Festival in 2020, Nandan Nilekani, who headed the team that founded Aadhaar, launched the Open Credit Enablement Network (OCEN). In the process, India opened yet another chapter in its journey of financial inclusion. Just like JAM (Jandhan, Aadhaar and Mobile) enabled 430 million Indians to own a bank account, the OCEN network strives to meet the needs of the credit starved—especially, small and medium enterprises (SMEs). This credit gap is estimated at over $300 billion.

OCEN is shaping a new paradigm for credit wherein lenders and marketplaces can build innovative, financial credit products at scale using public digital rails. Just as the Unified Payments Interface (UPI), which revolutionised the business of payments, is helmed by the National Payments Corporation of India (NPCI), OCEN is guided by CredAll, a non-profit company. Open spoke to Hrushikesh Mehta, co-founder and chief evangelist at CredAll, to review the record of OCEN over the last two years and its prospects. Excerpts:

What credit need is OCEN trying to solve?

The current loan processes are still largely manual. Yes, it is more digital today than it was 10-12 years ago. Yet, even today you fill in a form, attach documents, which then need to be verified by the lender; then they must check if the bank statements have been verified. Thereafter, the bank must verify your address. All of this takes a couple of trips and costs the lender anywhere between Rs 3,000-5,000 to process the loan application.

Given this cost structure, the ticket size of the loan must be around Rs 3-5 lakh for it to be profitable for the bank. Now, India is hyper-competitive. If I need to give five loans before the account turns profitable, I won’t offer sachet loans.

In other words, the bottom of the pyramid, which needs small-ticket loans, will not be serviced.

In that case, the only way to solve this problem is to make this completely machine and technology-driven.

So, a key use case for OCEN is to provide sachet loans by lowering the costs of onboarding?

For example, even in a village, if I must walk four or five kilometres to just put in my application, or someone must come and verify where I live, it doesn’t make sense.

We have created a protagonist, Rajni, for our campaign. It’s a false name but the story is true. She is a vegetable vendor in a small village with access to a smartphone and the internet. One use case is that she should be able to take a Rs 500 loan at 9AM and pay it back by 5PM the same day.

At the same time, it should be profitable for the lender to extend that loan and Rajni should not be charged an interest rate like 6 per cent a day, or whatever they pay today. Instead, it should be provided at the annualised bank rate today, which is anywhere between 11-20 per cent. This is the problem we are trying to solve.

How do you go about resolving this problem?

First, there was Aadhaar, which solved the identity problem. Second, there was UPI, which solves the cost of transfer. Then we have the Account Aggregator (AA, licensed by the Reserve Bank of India), which enables consent-based sharing of financial information. Since it is straight from the source, it needs no verification. Finally, you have OCEN, which has created a standard protocol for lending within the regulatory framework.

The other thing we observed is that while most Indians use digital systems, they don’t get loans digitally. For example, if I am a food delivery person, I don’t get credit anywhere. Similarly, if I am a dairy farmer and I am dealing with a cooperative, I don’t get any milk receipt financing.

So, if we can provide embedded credit, whereby wherever I am transacting I can provide you credit right there and do it completely digitally, it solves that problem. We are thus standardising the process.

The second is that we are trying to ease the integration of a merchant and the financial sector. For example, Amazon may not choose to integrate with a small non-bank finance company. So, we are trying to ease that cost of integration by building an open gateway. Imagine there are five LSPs (loan service providers), four small and one large. They can all integrate with the OCEN gateway. And at the other end, we’ll integrate banks.

Hypothetically, if there are five people who have a startup integrated with the gateway, then all those lenders become available because the protocol and the data transfer requirements are standard.

Can you share an actual case study?

There is an NBFC (non-bank financial company) called 121 Finance (delivering working capital to MSMEs) that is integrated with GeM Sahay (an application that addresses credit access challenges for MSMEs operating on the government e-market site, GeM). If it weren’t for the OCEN gateway GeM would never have entertained a small Jaipur-based finance company like 121 Finance.

What we are trying to do is create an opportunity for everybody, regardless of size. The gateway solves this and the standardisation problem.

And the third major problem it solves is the ability to control and remove bad actors. We have all heard of these ongoing digital lending issues and misrepresentation of offers. We can control this through (software) code, whereby we can detect and suspend these bad players from the network.

How are you approaching the rollout of OCEN? Will it be like the case of UPI wherein BHIM (Bharat Interface for Money) was launched as proof of concept for an app used to transfer money in real time by making wallets interoperable?

Just like how BHIM was built for UPI, we have developed one reference example with the GeM (the government e-market place) called GeM Sahay. In addition, we have also built GST Sahay in collaboration with SIDBI (Small Industries Development Bank of India) to enable GST invoice-based financing.

The first one is for purchase order financing. The second one is invoice financing, basically from GST. It is completely digital, with money being transferred to their account in less than 10 minutes.

GeM Sahay is already functioning. And we did it on the basis of a small pilot. At that time AA wasn’t available but now we are working to expand it to all the sole proprietors registered on GeM. The value of the purchase orders issued every year to them is Rs 30,000 crore.

Under GST Sahay, we have given five to six loans as a test case.

Now we have invited 10-12 lenders, public and private sector banks, and NBFCs to begin their participation; we are building the integration as we speak.

What was the interest rate on the loans offered in GeM Sahay’s pilot phase?

The interest rates range from 10.95 per cent to 17 per cent. We are already in the low teens. NBFCs charge a little more because of the cost of funds. Thus, we are already getting to that bank credit rate for these small borrowers, which is very, very encouraging.

What rates would the same MSMEs be charged earlier?

Anything from 24 to 36 per cent, if not a daily interest rate. It was extremely high.

Why do the small guys get trapped in this vicious cycle of poverty? One reason is that they access the informal loan market where they are charged very high rates. As a result, they are not able to get credit and hence unable to expand even their micro businesses.

Now, if you give them credit, wherein formal credit is at a lower cost, and you can provide that based on data—give some surety to the banks that they will get paid back—they will come in tentatively, but they will begin.

Look at what happened when credit bureau data came to our country in 2005. The personal loans market exploded. And along with that the consumer durables market and all the consumption that goes with it.

We are trying to drive a similar thing for MSME credit where we can make it affordable for the lenders to lend and also make it affordable for the borrowers. And this, we hope, will drive economic activity.

By enabling access to credit, and at affordable rates, is OCEN proving the advantages of a formal economy?

Absolutely. UPI drove this behaviour of pushing money into bank accounts. Otherwise, it was happening outside of bank accounts. What those transactions also do is create a track record—that you have money, that you are earning more than you are spending, and that sort of thing.

And basically, once that starts happening, a banker feels comfortable to be able to give credit. In the past, we all thought only repayment history was the track record. But now, if your bank statement can become your track record, even if you have never taken credit, people will still lend to you because they can see that you have money.

To sum up the OCEN initiative, you are basically democratising credit in India?

Exactly. Just like NPCI runs UPI, Sahamati runs AA, there is an organisation running and maintaining the OCEN system. This, too, is a non-profit and called CredAll; its full form is Credit Democratic Alliance. The whole idea is to get credit to everybody, not just to the 100 million.

The AA framework and OCEN are pivoting lending from one based on assets to flows. Is that correct?

Yes. The way to think about this is that we all tend to be path-dependent when we do something for too long. So, it was always that if you gave loans to MSMEs, you had to collateralise because they were high-risk—because there was not enough data about them to take a call.

Yet, if you were a salaried person, I could give you a personal loan in 30 seconds. Why so? Because there would be data about your financial capacity.

Therefore, what we are doing is being completely tech-based so we can keep the costs low. If you have enough data, you should be able to underwrite; AA solves this. Finally, the mode of transferring money should be cheap, which is what UPI solves. And I need something to authenticate the borrower cheaply—for that there is Aadhaar.

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Credit Democracy ~ by Anil Padmanabhan

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