Credit on ONDC and OCEN awaits their 'UPI moment' as deployment begins

A lot of interest in joining an open network also boils down to how operational costs can be brought down in lending businesses. NBFCs and fintech could drive credit innovation on open networks

With the Open Network for Digital Commerce (ONDC) venturing into finance services, many are asking if this clashes with the format of Open Credit Enablement Network (OCEN), the platform that was launched to make access to unsecured credit for small businesses easy. 

Both these open networks, ONDC and OCEN, are laying out plans to partner with lending institutions and ensure credit is deployed to the underserved parts of the larger market. 

Players working with both platforms said that is not the case, as both the two services involve different requirements. 

For instance, ONDC has gone live with six lending services providers and lenders such as Aditya Birla Finance, DMI Finance, and Karnataka Bank, with talks with three more lenders to go live on the platform soon, according to Hrushikesh Mehta, senior vice-president of financial services, ONDC. 

Meanwhile, OCEN is conducting pilots for small ticket, short tenor loans while gradually rolling it out for scale, said Sharad Sharma, co-founder, iSpirit Foundation which operates OCEN. 

It counts players such as Indifi, Vivifi India Finance, KredX, among others as loan agents whereas financial institutions such as Kotak Mahindra Bank, ICICI Bank, U Gro Capital, among others as lenders. 

What are open networks? 

For the unacquainted, an open credit is analogous to an IPL cricket tournament, says Mehta. 

These networks are not the IPL teams, but creators of the larger domestic cricket ecosystems. Different teams come on board, the network creates ground rules, and enables an environment for each team to score as many runs as possible. 

Sharma calls these networks a product of ‘combinatorial innovation’ which utilises multiple building blocks of the Digital Public Infrastructure (DPI) such as Aadhar, account aggregator, e-KYC (electronic Know Your Customer), Digilocker, among others.  

“Not sufficient innovation has happened on top of the building blocks of DPI. To increase innovation, the goal is to help people think about it through open networks. They are a way for people to do better combinatorial innovation,” he said. 

Bridging the credit gap

“The big difference in financial services, especially lending, is that data needs to be pulled and provided to the lender to decide whether they want to give you an offer at all. The difference also comes in the underwriting,” Mehta from ONDC said. 

The credit gap in lending to micro, small and medium enterprises (MSMEs) is also large, less than 11 per cent of these units have access to formal credit. 

Meanwhile, Sharma pulls out a statistic to answer the ‘why’ behind credit on open networks. 

“There aren’t enough project evaluators to give MSMEs a loan, and many enterprises resort to collateral-based lending. Only about 15 per cent units have increasing revenue as per GST data to get them even a working capital loan, the rest not getting it easy since banks may not be comfortable lending to them,” he said. 

The solution lies in small value, short-tenure loans, he believes. 

“One may not know what a business will do in one year. But, one may know how it can be done in two months. What if somebody gives you a working capital limit so only for two months? Then they will evaluate you again. The best way to mitigate risk could be to do it short-term,” he said. 

Reducing loan processing cost

A lot of interest in getting on an open network also boils down to how operational costs can be brought down. 

These costs include the costs of acquisition, of application, disbursement, collection, among others going upwards of Rs 3,000 per loan. 

According to Mehta, these costs can come down by 65 per cent and with the right workflow, it takes about six minutes to sanction the loan on ONDC. Since January, it has processed about 60 loans on the network in early pilots. 

“You apply for a loan, use an account aggregator and this gets broadcast to the lenders on the network. They process it at their end, pull up your own report at their end, and under 60 seconds, they return an offer. The user selects an offer, does KYC, provides a disbursal account, uses eNACH or eMandate to do the repayment, signs the agreement with Aadhaar,” he said. 

Later this year, ONDC plans to introduce business-to-business (B2B) credit; larger ticket loans for public and private limited companies. 

Early interest from fintech, not banks 

The banks may not have an early interest in these open networks since their core businesses are performing well, a senior executive with an open network said. 

“In essence, while the banks are all about the safety of funds, the non-bank financial companies (NBFCs) should be the drivers for innovation for credit on open networks,” the person added. 

However, for that to happen, the cost of capital for NBFCs should be reduced, and treat these institutions as vehicles for innovation of credit. 

“Banks are also trialling it out. They don’t want a lot of NPAs to come via this channel and we think they're being careful and giving only selective loans,” a founder of a fintech company said, requesting anonymity. 

Meanwhile, fintechs have been showing early interest in open networks. 

“I think ONDC rails are efficient and in the next two years, many regulated entities coming on the platform as they can see data such as GST, account aggregator, among others basis which they will have multiple ways to kind of analyse a particular loan request and hence the chances of loan dispersal are higher,” said Nilay Patel, founder and managing director, EasyPay. 

Patel believes that more customers and partners will be required for open networks to mature. 

Other fintechs are eager to be onboard ONDC as the network provides another channel of distribution of financial services. 

“We are excited because it creates another distribution channel which is very open, transparent, and scalable purely because our ability to reach out to every type of a consumer through a single platform will go up,” said Ashish Goyal, co-founder and chief financial officer, Fibe; a digital lending fintech. Fibe is in the process of integrating on ONDC, he added.