OCEN brings together all ecosystem members on one platform to facilitate a more seamless interplay between lenders, borrowers, and Loan Service Providers (LSPs) at scale.

India is home to the world’s largest number of Micro, Small and Medium Enterprises (MSMEs) with over 64 million of these businesses generating 110 million jobs, contributing approximately 30% of the nation’s GDP, 36% of the nation’s manufacturing output and 44% of total exports. India’s economic trajectory is on the upswing and opportunities to join regional and global value chains are growing, yet a concerning trend emerges – more than 13,000 MSMEs shut shop in the financial year 2023 and the share of MSMEs in the country’s GDPs and exports has been lagging over the past couple of years, far below its potential.

Micro-enterprises, in particular, find themselves at a growth plateau, grappling with impediments to transition into Small and Medium Enterprises (SMEs). The persistent spectre of a credit crunch compounds the challenges, with an estimated financing gap of over $500 billion and a mere 11% of India’s MSMEs availing formal credit.

The historically unorganized and underbanked nature of India’s MSME sector, coupled with a dearth of requisite data trails for establishing creditworthiness, has exacerbated the problem. But then the 2020 pandemic disrupted this paradigm with the emergence of two key developments. First, MSMEs were compelled to go online and with increased technology usage and digitalisation, a world of opportunity opened up. Secondly, the Open Credit Enablement Network (OCEN) was launched, aiming to bridge the lending gap through a synergistic approach, underpinned by India’s digital public infrastructure.

OCEN brings together all ecosystem members on one platform to facilitate a more seamless interplay between lenders, borrowers, and Loan Service Providers (LSPs) at scale. Developed by the think tank Indian Software Products Industry Round Table (iSPIRT), OCEN has been making waves, using the foundation laid by Aadhaar and UPI to simplify the credit origination, underwriting and delivery processes, creating a level playing field that equitably benefits all participants, regardless of size. The essence of OCEN’s merit lies in its ability to build trust and transparency in the lending value chain by breaking down information asymmetry through its shared interface, decentralised protocol, open network and common standards.

The platform creates healthy competition among lenders, which allows MSMEs to get credit at the most efficient rates with shorter turnaround times. MSMEs, earlier considered thin-file borrowers, can build credit profiles based on transaction history and gain customized credit options that are more aligned with their financial cycles. Banks and NBFCs find value in an expanded pool of assessable borrowers, reduced operational costs and data-driven decisions.

By leveraging India’s digital stack and account aggregator framework, OCEN helps lenders to more accurately evaluate risk and business realities using non-traditional information, including cash flow data. LSPs, which include e-commerce entities and marketplaces, benefit by integrating financing solutions directly into the customer journey, deepening user engagement by funding both consumers’ purchases and suppliers’ working capital needs. Affordable lending can now be extended to hitherto untapped sectors like agritech and logistic providers through embedded finance that tackles existing supply and demand side constraints.

OCEN already leverages cross-platform synergies with Aadhar, UPI, Account Aggregator and the Data Empowerment and Protection Architecture (DEPA) framework to make MSME loans more viable. Going ahead, there is potential for enhanced interoperability between OCEN and ONDC (Open Network for Digital Commerce), an approach that would not only democratize access to credit but also expand the opportunities for MSMEs to engage in digital commerce, providing a dual thrust to growth.

OCEN 4.0, with its improved API specifications and the introduction of a registry & product network, eliminates the frictions associated with small-ticket loans. This iteration empowers lenders to diversify their loan portfolio and extend MSME’s short-term, customized, sachet-sized options, previously hindered by the high cost per loan. With UPI gaining traction abroad in countries like Singapore, France and the UAE, OCEN too could aim to eventually reimagine the digital lending landscape internationally.

Sailing into the unchartered territory of encouraging widespread OCEN adoption in India comes with its own challenges. Cybersecurity and privacy concerns, a persistent reliance of MSMEs on cash transactions and a general lack of awareness about OCEN are sizeable obstacles that need attention. Educating MSMEs about OCEN will need targeted efforts and digital literacy programs to increase understanding of this innovative credit access model. Addressing digital safety concerns and emphasizing the importance of timely loan repayment can go a long way towards driving user engagement in the OCEN ecosystem.

Looking ahead, the vision for OCEN is to mirror the monumental successes of Aadhaar and UPI as a Digital Public Good, etching another success story in India’s digital journey. As OCEN evolves, a more inclusive financial ecosystem will flow from its potential to redefine MSME lending in India and support the sustainable success and resilience of smaller businesses. With continued collaboration and incentivizing usage, OCEN can be the wave that propels the MSME sector forward, ensuring that the benefits of India’s economic progress are experienced by individuals and businesses across the board.

Divyesh Dalal is the Managing Director & Head – Global Transaction Services, SME & Institutional Liability Business at DBS Bank India. Views are personal.

As featured in The Financial Express