What is OCEN 

The Open Credit Enablement Network (OCEN) is an emerging digital public good
(DPG) that has the potential to democratize and transform India’s digital lending
landscape.
It’s a framework of APIs that allow borrowers to easily interact with lenders (loan 
service providers (LSPs), account aggregators, etc.) and get small credit loans.

Which problem OCEN is solving

In India, we have deposits of around 2 trillion USD. But our MSME sector is not 
able to get loan from formal institution.
The MSME sector require loan of around 300 billion USD. MSME forms an 
important part of our economy & we need to make sure that MSME are able to get loans to run, expand their business.

Challenges in Lending Industry
In a typical loan cycle, these are steps involved.

1. Identification & acquisition of a borrower
2. Verifying & establishing the credit worthiness of the borrower
3. Based on the above 2 steps, identify, how much loan can be given to the borrower 

4. Connecting the borrower with lender (bank/NBFC..)
5. Disbursal of the loan so that borrower can get the loan ASAP.
6. Collection of various loan installments

We need to understand that MSME or other borrower running their business daily and they can’t run around the bank, NBFC for days.

This will impact their existing daily business.
Also, in many cases, these borrowers don’t have any formal 
document, balance sheet or asset, which can be given as collateral for disbursement of the loan.
If a lender goes through above 6 steps in the current way, it cost him 
between 3000-5000 INR for each loan application.

To really make profit, a lender need to disburse loan of around 3-5 lakh per applicant.
This means that borrower with need of small loan amount get excluded from the current formal system.

In many cases these borrowers (especially MSME) need loan amount in the range of few thousand rupees.

How OCEN is solving this
OCEN is solving this problem, along with help of AA (Account Aggregator) and Embedded Finance. 
Account Aggregator: It’s a method that involves compiling information from 
different accounts, which may include various bank accounts, investment accounts, 
credit card, account, insurance, and other consumer or business accounts, into a single place.
This can be done by connecting to the various financial institution through API 
(Application Program Interface). It is vital that consumer should have given his 
consent before various data related to his accounts etc. is collected and aggregated.
Embedded Finance: It’s the placing of a financial product in a nonfinancial 
customer experience, journey, or platform.
If a borrower gets a working capital loan, at his business, while doing his business,
based on the business value, & later loan installment amount is automatically 
deducted from business income, it solves all the problem.
For example, for a dairy farmer, who is supplying to dairy cooperation, gets receipt from dairy cooperation. 

Now based on those receipts, it can be identified
1. How much business that dairy farmer is doing on a monthly basis
2. Whether dairy farmer is regular in supplying the dairy product ..doing the business diligently
3. Instead of dairy farmer going to bank, a LSP (Loan service Provider), can 
arrange a loan for this farmer by connecting him to formal institution (bank/NBFC).
4. All these steps can be performed, with technology, by the LSP, while dairy farmer 
is, at dairy cooperation or while he is at his farm.

Nandan Nilekani sir, summarized all this while addressing a gathering hosted by
Sahamati, the alliance of Account Aggregators,

“

Working capital is often not available to small businesses because of an information
asymmetry and because the lender is not able to come and make a physical
assessment of their assets.

Taking our example further, LSP (Loan service provider) can take the consent of the
dairy farmer & collect all this financial data with help of Account aggregator.

So, the dairy farmer need not run around various banks or other financial institution, 
to collect & aggregate his own financial data.

While disbursing the loan, this data also can be taken into consideration, wherever
applicable.

However, if a firm has a digital footprint of its own business, has the [record of]
payments made to its vendors, of the purchases made by consumers from them 
and the invoices and the taxes that are paid, then that information can be used to 
give that MSME a working capital loan.

And, therefore, digital footprints of a small business or an individual can be used to
access credit.

This can lead to the democratization of credit.”

Example for OCEN

Let’s take another example here. Now, many shops have started accepting payment by UPI.
These shopkeepers have the QR code, which one need to scan to pay the
amount.

So, after taking consent from shopkeeper, all the purchase amount data passing
through that particular QR code can be read. This will help, LSP (Loan Service 
Provider) to understand the overall turnover at that shop. 

Also, if shopkeeper is paying to whole seller or manufacturer of the good by digital way, it can be identified, how much amount, shopkeeper is spending to buy the various product for his shop. 

Along with the data from Account aggregator (AA) for the shopkeeper, full 360 
degree view can be created for that shopkeeper.

Important point to note here is, for collection of all this data, shopkeeper need not go
away from his shop. Also, he need not put any asset as collateral. But this data 
derived from various digital devices act as Collateral, while sanctioning the loan amount.

So, shopkeeper, gets the loan, in his shop, while still running his shop & based 
on the data/turnover at his shop.

A real digital transformation of the MSME business.

Role of OCEN

OCEN was launched in July 2020 as an open protocol infrastructure.

It facilitates the interactions between LSPs (FinTech’s or other e-commerce
players) and mainstream lenders ( Banks and NBFCs).

It provides a standard set of tools representing the various components of a
typical lending value chain, these players to ‘plug in’ lending into their current
operations.

As of today, Sahay is available. We can say that Sahay is OCEN’s first
rendition. Just as BHIM implemented UPI & became the first reference for
UPI, Sahay is first implantation of OCEN.

Sahay app is supporting various use case.

1. Invoice-Discounting Use case: Merchants can provide their outstanding
invoices & can get loans against that.
2. Merchants can sign up and get instant loans from lenders by providing
their GST identification numbers and bank details.
At the time of writing of this article, Sahay GST and Sahay GeM (government e-marketplace) APP is already available. 

Here, we should also know about CredALL.

CredAll is a non-profit group that enables cash-flow based lending.

Its responsibility include

1. Implementation of OCEN
2. Providing access to the new protocol to various industry participants
3. Stakeholder education
4. Publishing guidelines and principles,

5. Connecting TSPs (Technology service providers) with lenders and LSPs
6. Helping LSPs in creating business cases. That is, helping various LSPs
in collection of relevant and important data related to various borrowers,
which can help bank in quickly doing risk assessment of the borrower
and disbursing the loans.

7. Identification and empanelment of certification agencies

LSPs plays an important role now.
LSP, along with TSP, can utilize various alternative sources of data to
make the most accurate risk assessment algorithms.

They need to make sure that borrower get the loans and all participants
.in the chain (LSP, bank/NBFC, TSP..) can make profit while keeping the
loan interest rate at market rate or lower.

Also, now borrower can view and compare loan offers from various
lenders in one place.
Borrower can provide his exact requirement (the total amount of loan, the
tenure of the loan etc. ). It’s sort of a personalized loan offer is created for
borrower.
All the other information (which otherwise a typical bank branch would
have asked such as PAN, address, etc. is submitted by the AA directly to
all lenders via an API call – thereby removing all paperwork).

DEPA – Data Empowerment and Protection Architecture (DEPA) is a secure,
consent-based data-sharing framework.
It plays a crucial role in establishing AA data-sharing protocols. DEPA aims to
help individuals to seamlessly and securely access their data and share it with
third-party institutions.

Conclusion: OCEN, along with AA (account aggregators), LSP (loan service
providers), are creating an ecosystem, where borrower can get loan from 
bank/NBFC as per their need. That is sort of getting a loan offer, totally personalized as per their need, without running behind various agencies. 

Technology, mainly the digital footprint of borrower is helping in creation of accurate
data for the borrower, which can help bank in taking faster decision, while disbursing the loans.

Now, borrowing money will 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.

Also, small amount loans (sachet loans) can be disbursed, while still making
profits for everyone.

A cheaper rate of credit will help various entrepreneurs, existing business
owners, farmers to grow their business, create new employment
opportunities and grow overall economy of the country.

In the past, various loan schemes were devised, which were helping people,
who were part of formal economy.

Though that had surely helped some people/industries but in many cases, we
have seen either borrower, defaulting on the loans or loan getting waived off
by various parties or rich person becoming richer resulting in a big divide
between Have and have-nots.

OCEN, by nature, is going to help all people (Top of the pyramid to bottom of
the pyramid.).

This inclusive nature is very important so that each person in the society is
able to create a successful business (or get employment as per his talent)
and live a meaningful, fulfilling and responsible life.