By Jay Makhijani
Less than 25% of Micro, Small and Medium Enterprises (MSMEs) have access to credit in India. The credit gap for MSMEs is estimated at INR 20-25 trillion. MSMEs account for nearly 27% of India’s GDP. On average, the MSME sector comprises approximately 36 million units, providing employment to about 80 million individuals. MSME-related products constitute a significant portion of India’s exports. During 2021-2022 (April-September), they accounted for 45.8% of overall exports.
Traditional lending models, geared towards long-term commitments and stringent eligibility criteria, often leave out a significant portion of businesses, particularly those without stable incomes. This disparity in access to credit stifles growth and innovation within the MSME sector. The Open Credit Enablement Network (OCEN) attempts to fill this gap by allowing lenders to access data on MSME firms that enables them to offer short tenure and small ticket loans.
The recently launched OCEN 4.0 platform introduces a promising shift in MSME lending. By leveraging technology and innovative financial instruments, Open 4.0 aims to democratize access to credit, particularly for the 85% of MSMEs currently underserved by traditional lenders. OCEN 4.0 provides an API (Application Programming Interface) framework that serves as a standardized platform for lenders and borrowers to connect and transact. With the integration of account aggregator frameworks, Open 4.0 empowers lenders with comprehensive, high-provenance data. This allows for better risk assessment and enables cash flow-based lending, unlocking access to credit for previously underserved MSMEs.
OCEN, through its API framework, simplifies the process for borrowers to access credit. Borrowers can use the platform to apply for loans, receive credit offers, and interact with multiple lenders seamlessly. This increased accessibility can be particularly beneficial for individuals and businesses that may have had limited access to credit in the past.
Further, this platform, incorporates real-time reporting mechanisms, reducing regulatory compliance burdens for lenders. This ensures adherence to guidelines while fostering a conducive environment for innovation and growth.
Moreover, in many such platforms, just the creation of a meeting space for lenders and borrowers is not enough. Someone playing the role of a connector or a catalyst is usually desirable. Therefore, OCEN 4.0 introduces the concept of borrower agents, streamlining the lending process and fostering relationships between borrowers and lenders. These agents act as intermediaries, facilitating loan applications, verifying borrower information, and expediting the approval process. By reducing administrative burdens and enhancing transparency, borrower agents play a crucial role in improving access to credit for MSMEs.
Potential Risks and Mitigation Strategies
Implementing OCEN 4.0 entails various risks, but proactive risk mitigation strategies can help address these challenges effectively.
One significant risk is related to data security and privacy concerns arising from the extensive collection and sharing of sensitive financial information within the OCEN ecosystem. To address this, robust encryption protocols and data protection measures must be implemented, along with regular security audits and compliance with relevant data protection regulations. Additionally, operational challenges and infrastructure readiness pose a risk, particularly in areas with limited digital infrastructure and connectivity. Investing in expanding digital infrastructure, providing training on digital literacy, and developing offline capabilities can help overcome these challenges.
Credit risk and default management are also critical considerations, given the inherent volatility of MSME lending. Implementing robust credit risk assessment models, diversifying lending portfolios, and offering financial literacy programs to MSMEs can help mitigate these risks. Furthermore, regulatory compliance and legal risks must be carefully managed to avoid fines, penalties, and reputational damage. This involves staying updated on regulatory changes, establishing compliance frameworks, and fostering dialogue with regulatory authorities.
Market concentration and competition risks refer to the possibility of a few large players gaining significant control or dominance within the OCEN ecosystem. In such a scenario, these dominant players may have the power to influence market dynamics, potentially limiting competition and choices available to borrowers. This concentration of power could lead to less favorable terms for borrowers and hinder the development of a diverse and competitive lending landscape within the OCEN framework.
To mitigate these risks, regulatory interventions are crucial. Regulatory bodies can enact policies and regulations that promote fair competition within the OCEN ecosystem. These regulations may include measures to prevent anti-competitive practices, ensure transparency in lending processes, and promote equal access to lending opportunities for all players, regardless of their size or market presence.
Furthermore, collaboration among stakeholders is essential to foster innovation and diversity within the OCEN ecosystem. By encouraging collaboration between large financial institutions, fintech startups, and other players, stakeholders can pool their resources, expertise, and ideas to develop innovative lending solutions that cater to the diverse needs of MSMEs and borrowers. This collaborative approach can help create a more inclusive and competitive lending environment, where borrowers have access to a wide range of lending options and services.
Support for alternative lending models is also critical in mitigating market concentration and competition risks. Alternative lending models, such as peer-to-peer lending platforms and community-based lending initiatives, can provide additional options for borrowers, reduce reliance on traditional financial institutions, and promote healthy competition within the OCEN ecosystem. By providing support and incentives for the development and adoption of these alternative lending models, stakeholders can help diversify the lending landscape and reduce the risk of market concentration. The role and active consultations with the Reserve Bank of India and the Finance Ministry would be crucial here to foster easier credit access to the MSME sector.
About the Author: Jay Makhijani is a Program Manager at Insights International with a focus on finance, tech, and inclusion policies.
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