Open Credit Enablement Network (OCEN)- The UPI Moment For The Indian Lending Sector

The Indian financial sector is going through a series of revolutions – from the introduction of the United Payments Interface to new enhanced banking systems. Open Credit Enablement Network (OCEN) is another arm of this revolution that’s much in talks nowadays. 

OCEN represents the introduction of a new standard in the formal financial sector. Its primary objective is to democratise and standardise the access to credit line, especially for micro, small, and medium-sized enterprises (MSMEs) and individuals. 

In this blog, we aim to help you understand:

  1. the basic idea behind the development of the open credit enablement network
  2. how it works
  3. its benefits 
  4. the future it holds for the Indian lending sector

What Is Open Credit Enablement Network (OCEN)?

In simple terms, OCEN is a framework of APIs that allow borrowers to easily interact with lenders (loan service providers (LSPs), account aggregators, etc.) and get small credit loans. This could be inter-day or intra-day loans that help individual owners and MSMEs run their business smoothly without money crunch.

Furthermore, OCEN’s APIs help create innovative financial credit products that benefit both the borrowers and the credit providers.

With OCEN, lenders can:

  • custom-create loan products
  • address financial needs of individuals and MSMEs 
  • underwrite norms based on customer information gathered from government sources and monitor credit

Meanwhile, individuals and MSMEs benefit in the following manner

  • access loan options offered by various lenders on the LSP platform. 
  • Completely digital credit solutions
  • Cash flow-based evaluation instead of balance sheet-based evaluation 
  • Simple application process with minimum turnaround time

But, the bigger question is, how did OCEN come into existence? What was the basic idea behind its formulation? Let’s take a look.

Basic Idea Behind OCEN — A Beginner’s Guide

According to the current KYC Directions, a loan amount upto INR 60,000 a year can be disbursed to a person who’s registered via Aadhar OPT-based KYC process.

The Reserve Bank of India is however in plans to increase the limit to benefit relevant stakeholders. The average loan ticket size of individuals and MSMEs is approximately INR 2.5 lakhs and INR 10 lakhs, respectively. 

An increase in the limit would cater a larger audience segment looking for loans as well as provide momentum to lending. The aim is to shift credit line access from organisation-centric to individual-centric ideology. 

OCEN — Another Feather in the Cap For The India Stack

In the past, financial institutions like national and commercial banks, NBFCs, etc., were the backbone of the entire formal lending system. 

Borrowing meant visiting a bank branch or speaking to an agent to get a loan. 

This led to many issues.   

  • Limited access to a major chunk of Indian population because of presence of no banks or similar institutions in their areas
  • Most borrowers did not have the right data needed by financial institutions to gauge their risk profiles and issue loans. 
  • Only some financial institutions were willing to serve this particular segment of borrowers, however, with many underlying terms and conditions.

Meanwhile, many informal lending institutions extended a hand of help to this underbanked and underserved population. They did provide small ticket-size loans to them, however, against a very high rate of interest which many borrowers couldn’t afford. 

To bridge this gap and help people avail loans without much hassle, Open Credit Enablement Network was introduced under India Stack. 

India Stack is a set of APIs developed with an ideology to create a unified software platform to bring India’s entire population under the digital umbrella. It aims to help individuals move towards a presence-less, paperless, and cashless economy and eliminate many underlying problems of the Indian economy, such as availing a loan.  

The introduction and adoption of Aadhar, UPI, e-KYC, Aadhar-enabled payment service, and DigiLocker are some examples of successful projects completed under India Stack.

With OCEN, the government aims to revamp the entire lending system. It aims to develop an ecosystem where every financial institution (formal and informal) becomes a Fintech-enabled credit marketplace and extends loans to borrowers without hesitation. 

It also focuses on providing borrowers with the convenience offered by the informal sector along with the protection and cost-effectiveness of the formal financial institutions under one roof. 

Open credit enablement network under India Stack

Here’s an example to explain the entire concept. A small farmer working in the hills of Uttarakhand can now avail a small ticket-size loan by the means of OCEN. He doesn’t need to visit a bank branch or put his assets on a mortgage. He can simply avail an inter-day or an intra-day loan via Aadhar verification. 

Let’s move further to understand how does OCEN exactly work.

How Does Open Credit Enablement Network (OCEN) Work?

As defined, OCEN is a framework of APIs developed over an agreed-upon framework between three four players

  • Borrowers: Individuals or MSMEs looking to source credit lines for various reasons. 
  • Lenders: Banks, NBFCs, or other financial institutions with capital and access to core banking networks willing to offer credit lines to borrowers.  
  • Loan Service Providers (LSPs): Any digital platform such as a web or mobile app that has an existing pool of customers interested in availing credit facilities.  
  • Technology Service Providers (TSPs) – Fintech organisations that bring borrowers, lenders, and platforms onboard onto the OCEN protocol. Embedded Finance providers are an example of TSPs.

Each of these players have a key role to play in the entire lending process. 

  • Lending service providers act as agents for borrowers since they trust the LSPs 
  • TSPs offers the required plug and play capabilities and help reduce barriers of entry for any institution to carry out digital lending
  • Lenders deploy capital while focusing their energies on risk and compliance

What Does The OCEN Protocol Say?

The OCEN protocol has been built on seven critical principles acronymed as MODEALS

The open credit enablement network protocol

Minimalism – While OCEN enables lenders to offer tailored loan products to borrowers, it has standardized the entire application process. It has also defined all the components that stand as common denominators when issuing a loan. For instance, the interest rate, loan amount, terms and conditions, and so on.

Openness – Unlike many lending protocols, OCEN is built to aid interoperability and inclusion. This means, it’s not necessary for capital providers and LSPs to have a prior bilateral and proprietary connection. When a LSP implements OCEN API on its platform, it gets access to every other capital provider that has implemented the same on their own platforms, and vice versa. In short, it’s an open platform for everyone to connect with each other and commence business. 

Diversity: The entire MSME ecosystem is extremely diverse – be it products, services, adoption of new-age technology, and so on. OCEN in such an environment facilitates players of the ecosystem to innovate, collaborate, help one another and meet the financial needs.      

Embeddability: Another interesting fact about OCEN protocol is that embeds the entire loan application process on its platform. This enables borrowers to leverage digital lending and partner with brands or organizations they trust.

Agnosticism: From a technical perspective, OCEN ensures that interoperability and flexibility between technology implementation and credit products is duly met. This will, in turn, enable new market players to offer tailored services to the all the OCEN registered members.

Layered Innovation: The OCEN protocol uses 3 fundamental layers of IndiaStack to ensure safe and secure processing of loans. These are,

  • Aadhaar card – to verify borrower’s identity
  • Account Aggregators –  (for Data Authorisation)
  • UPI (for Processing Payments). ‍

Security: Most importantly, OCEN protocol is quite strict about data security. It implements strong encryption and authentication measures to protect customer data and prevent cyber breaches.

How Will OCEN Work? 

At present, the current OCEN framework on the Sahay app (the official handle) can be used for invoice discounting. 

However, it is expected that in the next couple of years, the IndiaStack team along with other stakeholders will expand the operations of the system and make it a household name. They’re hoping that as simple as a small grocery shop owner will be able to easily apply for interday and intraday loans through their smartphones, simply by sharing their business transaction history.  

As of date, about 30 institutions including traditional banks, neobanks, khata book companies, and tax filing applications are running pilot tests to gauge the ability of the technology and analyse its true potential.

Benefits of OCEN

After the massive success of UPI mobile payment platform, veterans are now banking on the easy adoption of OCEN in the Indian lending market. Listed below are some pressing concerns that OCEN is expected to address and bring about the much needed change in the lending side of the financial industry. 

benefits of open credit enablement network

Meaning, the introduction of LSPs has also transformed the lending behavior of the entire ecosystem. Here’s the key difference that happened. 

traditional vs OCEN-based lending system

Lending Service Providers — The Link Between OCEN And Financial Inclusion 

The entire functionality of OCEN depends on lenders and digital platforms. They need to adopt and adhere to the API specs for the concept to work and make a difference. However, there’s a gap between OCEN and financial inclusion. 

Lending Service Providers fill this gap. They provide the necessary technology, models, insights, and advanced analytics to develop innovative lending products and ensure their success in the financial market.  

new cash flow-based lending model

Here’s what’s entailed. 

  • Modify the entire business process along with the tech-stack of the lenders and LSPs in accordance with OCEN protocols. 
  • Develop a secure loan application platform and optimise customer journey
  • Partner with Fintechs backed by multiple lenders, LSPs, and a robust credit enablement ecosystem
  • Craft business rules and regulations pertaining to the needs and demands of the parties involved. 
  • Develop a line of communication and a layer of service for borrowers in collaboration with parties involved. 
  • Draft a robust payment reconciliation layer
how does LSP bring value to Five aspects of Lending in OCEN

Who can become a Lending Service Provider?

Any organisation or entity that can fill in the gap between a borrower and a lender can be an LSP with the help of the OCEN framework. For instance, a company that files taxes or creates legal documents, neobanks, B2B eCommerce platforms, payment gateways like Cashfree Payments, can turn into an LSP and bridge the much needed gap.

OCEN wides the scope of opportunity for fintechs

Collaboration between lenders and LSPs can improve

  • Collections
  • Underwritings
  • Customer acquisition 
  • Monitoring finances
  • Overal ROI

The end-goal that OCEN aims to achieve through its meticulous yet streamlined method is to democratise credit, and ensure credit reaches anyone and everyone in need of a loan. 

OCEN — The Ultimate Platform For MSMEs

As stated earlier, the MSME sector is facing a credit gap of about USD 330 billion. This is keeping the segment from flourishing and growing at a faster pace. 

The introduction of OCEN, however, serves as a blessing in disguise for the MSMEs. 

OCEN’s open protocols have been built to innovate the loan process at every step. It will help regulate credit lines and even ensure that every service provider is able to offer credit by just integrating to the OCEN platform.

  • 100% digital 
  • Instrumental in the rise of credit marketplace 
  • Easy for lenders to implement OCEN application programming interfaces
  • Digitised loan process making it easy for lenders to disburse credit  

But, will OCEN be able to solve the struggles of MSMEs?

While speculations do surround the question, many believe that OCEN will be a huge success in the Indian market. It will rapidly increase the availability of credit to small and medium enterprises, especially the ones that are already digitized. OCEN will give them the leverage to grow and overcome financial challenges. However, MSMEs that operate in limited data zone or low digital footprint will continue to face issues as lenders will need more proof before disseminating funds.

quick view of the lending value chain cash flow and emerging opportunities

What is the future of OCEN?

The introduction of the OCEN is expected to be the next big disruption in the Indian lending space. Its impact is anticipated to be the same as that of UPI in the digital payment system. Such market innovations are the ground for building smart business environments that not only benefits the general population but the economy as a whole.   

open credit protocol excels as similar to UPI

Once OCEN is launched in its full capacity, experts claim that it will not only digitise the entire lending process but ease credit availing facility for everyone, especially individuals and MSMEs. Moreover, the platform’s infrastructure also holds the potential to innovate retail micro-lending products and services and open new business avenues for banks, NBFCs, and other lending institutions. It won’t be a surprise to see more and more players jump into this space and develop even better products and services. 

All-in-all the concept of open credit enablement network in India is another step by the country to move in the direction of complete digitisation and make India the nation to get inspired from.     

Frequently Asked Questions

What is OCEN in India?

OCEN or Open Credit Enablement Network is a disruptive architecture developed to digitize as well as streamline the entire lending system of India. It aims to increase credit access, especially for individuals and small businesses in India, by collaborating efforts with lenders, lending service providers and technology service providers. 

What is OCEN lending?

OCEN defines a set of open standards that facilitate easy communication between various players present in the lending value chain. It basically creates a common language for these players to collaborate and participate in the lending process. For instance, OCEN provides a platform for borrowers, lenders, and lending service providers to interact with one another and commence business.

What is OCEN API?

OPEN is a framework of application performance interfaces (APIs) that enable easy interaction between lenders, loan service providers (LSPs), and account aggregators. They help streamline the entire process putting each player in a win-win situation. For example, the APIs allow Fintechs to check the creditworthiness of a business, say an eCommerce, through the OCEN platform, further extending the loan. The concept is quite simple and will ensure that anyone can avail a loan by simply furnishing some basic details.     

What is embedded finance?

Also known as embedded banking, embedded finance refers to the seamless integration of newly developed financial services into the legacy non-financial services. It provides an infrastructure to customer-facing digital platforms to integrate or embed financial services on their platforms and increase adoption. Some significant examples of embedded finance include,
– Embedded payments 
– Embedded credit
– Embedded insurance 
– Embedded investments