Good morning! For this week's The Intersection edition, we look at the Open Credit Enablement Network, a lending platform that connects loan service providers with consumers. Touted to disrupt the landing landscape in the country, it could democratise access to formal credit lending. It does come with its share of challenges, writes Aprajita Sharma. We've also culled a list of must-reads for the weekend for you to get busy. Happy reading! | | If you enjoy reading us, why not give us a follow at @thesignaldotco on Twitter and Instagram. | |  | Towfiqu barbhuiya/Unsplash.com |
| Prabaharan Manoharan’s Aim Enterprises is a vendor of office gadgets on Government e-Marketplace (GeM), a platform akin to Amazon or Flipkart but exclusively for government departments. When Manoharan, based in the Andaman and Nicobar Islands, secures an order, he relies on a limited credit line from a public sector bank pledging his house as collateral to procure and fulfil it. | A year ago, he discovered GeM Sahay, which connects GeM vendors with lenders and offers working capital loans against ministries’ purchase orders (POs). The app-based platform offered a free, Aadhaar-based sign-up. POs and invoices were digitally mapped, which made credit assessment easy. There was also no need for collateral. The end-to-end digital journey was impressive and quick. It was like calling bids from lenders to finance his PO instead of negotiating with one banker. | “I could choose the offer I wanted,” Manoharan tells The Intersection. “I didn’t have to apply individually, and multiple lenders offered loans at different interest rates.” Although the best rate was nearly double the 9% per annum he paid on his cash credit account, it still saved him 25% in annual interest outgo. | GeM Sahay is the front end of an underlying digital lending superstructure called Open Credit Enablement Network (OCEN). A part of what is known as IndiaStack—a set of open Application Programming Interfaces (APIs) and digital public goods that hinge on establishing identity (Aadhaar-based eKYC), data-based decision making, and fast payments for commerce—OCEN is considered critical to onboarding India’s small businesses on to the digital bandwagon. Together with the Open Network for Digital Commerce and the United Payments Interface or UPI, it is expected to be the cornerstone of India’s digital transformation. | OCEN is an open network of APIs where borrowers, lenders and intermediaries (loan service providers) can interact with each other and partake in lead generation, credit assessment, loan disbursal, and repayment. GeM Sahay is the first loan service provider (LSP) under the OCEN protocol while U Gro Capital, 121 Finance, ICICI Bank, TATA Capital, Lendingkart and Kotak Mahindra Bank, among others, are lenders. Another LSP, GST Sahay, which will enable lenders to assess borrowers’ creditworthiness on the basis of their tax payments, is on the anvil. | OCEN relays a loan request on GeM/GST Sahay apps to all registered lenders. These lenders roll out term sheets to the borrower, who can then pick the best offer. Once the documentation is done online, the loan is disbursed. | “The entire journey is online and takes less than five minutes,” says Harshvardhan Lunia, co-founder and CEO, Lendingkart. | These two Sahay apps are reference interfaces, the way BHIM was for UPI. Soon, OCEN will be open to private LSPs. For example, platforms such as Swiggy, Zomato, Amazon, Flipkart, Ola, or Uber could well become LSPs to help finance low-ticket size loans to empanelled restaurants, vendors, or drivers. | Disrupting banking | “IndiaStack will take India from a 'prepaid' economy to a 'postpaid' one,” Morgan Stanley wrote in its October 31, 2022 country report titled Why This Is India’s Decade. The banker says the stack adds three layers that will alter the way India lends, spends, and | insures. “The first, OCEN, is disruptive to incumbent banks but will simultaneously raise credit penetration… this will democratize credit at a population scale for both consumers and businesses,” it noted. | India’s banking system is heavily skewed towards servicing large companies and formal enterprises. Despite a tiered system, which includes shadow banks, government-sponsored financiers such as SIDBI, and rural banks, small businesses find it tough to access credit on time and at affordable rates. A large number of them have no access to the formal credit system at all. Reserve Bank of India (RBI) data shows out of the loans worth ₹54 lakh crore ($666 billion) disbursed by banks in FY20, only 2.07% happened digitally. | In 2019, RBI estimated the Micro, Small and Medium Enterprises (MSME) credit gap at ~₹25 lakh crore. The turnaround time for MSME loan proposals in 2018 was 18 days for non-bank finance companies (NBFCs), 29 days for private sector banks, and 31 days for public sector banks (PSBs). | Public sector banks tried to sort out the issue with PSBLoansIn59Minutes, an online marketplace for loans up to ₹1 crore. PSBLoansIn59Minutes used algorithmic analysis of data points from multiple sources such as GST, IT returns, and bank statements—all factors that OCEN incorporates on what is expected to grow into a more robust and finely-tuned platform. PSBLoansIn59Minutes did not really take off because of the risk-averse nature of PSBs, which delayed sanctions and pushed up the rejection rate. | India has ~630 million MSMEs, 51% of which were in rural areas, according to the MSME Ministry’s annual report for 2020-21. Going by the dated Sixth Economic Census (2013), nearly 90% of the establishments are proprietary concerns. This is a highly unbanked or underbanked segment, and OCEN’s prime target. |  | Graphic by Varun Kumar |
| A large section of this segment needs really small ticket loans, which is unviable for the traditional banking system to deliver. In the traditional model, an appraiser has to physically travel to a location to verify a loan applicant’s business, assess personal worth, and pore through voluminous documents to establish creditworthiness and willingness to repay. | Hrushikesh Mehta, co-founder and chief evangelist of Credall, which steers OCEN, estimates a bank’s cost of lending (per unit) for the low-ticket segment at ~₹5,000. The cost-to-person alone could be ₹1,000. The marketing cost for a lead generation is about ₹3,000, and the rest would be for technology and payment. “This 5k cost has been whittled down to a few hundred (at best),” says Mehta, who is also an iSPIRT volunteer. There are other savings as well. | Lendingkart saved about 60%-65% in operational costs by doing away with non-digital banking services and reduced fraud detection services. | Tech axe to cut cost | Fintech companies mushroomed due to the penetration of affordable internet and smartphones, and deployed proprietary algorithms to identify and expand the user base of financial services. | Yet, they remain limited to niches. | “Even as banking regulations are the same, no two lenders have a standard procedure. It limits fintechs’ ability to grow their business at scale,” Nitin Sharma tells The Intersection. Sharma is CPO & MD (UpScale) at CredAble.in, a technology service provider to banks. | OCEN has a common language for any LSP to interact with any lender. This helps LSPs procure multiple loan offers for their customers in one go. Banks can assess creditworthiness better with the additional data provided by LSPs. For example, Swiggy or Zomato could well be aware of food orders and cash-flows of empanelled restaurants. These data points can help lenders analyse their loan repayment capacity beyond bank and credit bureau data. Account aggregators, who share potential borrowers’ banking data with their consent on OCEN, help lenders quickly assess their financial health. | This steep reduction in lending and operational cost gives lenders room to bring down the ticket size of loans. “Lendingkart has been able to roll out a ₹3,000 loan to a government contractor in a remote town in Kerala purely based on his previous order deliveries on GeM. With zero acquisition and processing costs, we were able to pass the cost-benefit to the customer,” says Harshvardhan Lunia. | Will the cost-benefit lower interest rates for borrowers? It’s too early to say. What this will do, however, is open a reliable banking channel which wasn’t available to them in the first place. This segment might currently be borrowing at high interest rates from loan sharks. “GeM Sahay vendors paid an average interest rate of 14.5% per annum,” says Mehta. | Going the UPI way | Private players launched payment apps such as Google Pay and PhonePe and piggybacked the UPI infrastructure after BHIM proved the use case. So too is OCEN attracting private players. | An official at a foreign bank that has a thriving MSME business and is closely watching OCEN evolve says even if lenders don’t pass on the cost-benefit initially, competition will eventually ensure that it becomes a borrowers’ market offering attractive rates. Even the interest rate spread or the mark-up between banks’ deposit and lending rates, which currently stands at ~3%, will start reducing, especially when OCEN starts servicing bigger loans in a competitive environment. “The mark-up might reduce once OCEN picks pace, but large volumes should compensate for it,” says the banker on condition of anonymity. Eventually, he expects banks to take a portfolio approach to lending on OCEN. | As OCEN data gets richer, new short-term loan products and finer pricing would emerge. For example, U Gro Capital, an NBFC, is focussed on cash-flow-based lending. “Our underwriting model is based on existing cash flows that take into account bureau, banking and GST data, and in-house tools to predict future cash flows,” says Anuj Pandey, Chief Risk Officer at U GRO Capital. “Our 70% business might be on the secured side, but the bounce rate has been much lower on the unsecured side.” | There are even unique use cases such as milk-receipt financing, buffalo financing, farmer seed purchase financing, gas financing for Ola/Uber drivers, truck financing, or kirana store financing. | Jocata, a technology service provider, is set to launch a retail framework under OCEN for personal loans. It has tied up with India Post Payments Bank, which reaches every nook and corner of the country. It will be an LSP in the new set-up connecting borrowers with banks or NBFCs. “We are integrating the first set of lenders,” says Prashant Muddu, Jocata’s managing director and CEO. “We expect it to go live by March.” | The hiccups | The pilot has not been free of challenges though. Sometimes lenders don’t close the loan account at their end even after the loan is repaid. “We have to chase them. The delay adds to the interest outgo for no fault of ours,” Aim Enterprises’ Prabaharan Manoharan tells The Intersection. | Credall’s Hrushikesh Mehta says this happens on occasion either because the payment is delayed or the product has not been delivered. The MSMEs are obliged to repay on the due date regardless. | According to a source familiar with the functioning of GeM, ministry payments are frequently delayed, and vendors have to chase bureaucrats to speed them up. | Second, integration with credit bureaus is weak. “When a customer applies for a loan on the OCEN rail, each lender has to check the credit history of the individual. With more lenders coming on board, the loan inquiry count for a borrower could be multifold even though it is for a single loan,” says Lendingkart’s Harshvardhan Lunia. | Besides, real-time bureau data is needed lest borrowers get overleveraged. There is a lag of 45 days in updating credit scores, often because of banks’ tardiness in sharing data. | Currently, GeM Sahay loans are only being offered to sole proprietors. “A lot of essential KYC documents are still offline. We need government and regulators’ support to digitise these papers so that they become uploadable for digital credit assessment,” Mehta concludes. | | ICYMI | | Wonders never cease: You’ve probably heard of Maharishi Mahesh Yogi, the man who founded the Transcendental Meditation (TM) movement and was once the favoured guru of The Beach Boys, The Beatles, and Mia Farrow. But do you know about TM itself? Did you know TM’s contemporary practitioners include Kendall Jenner and Lindsay Lohan, and that it has its own country (non-sovereign, of course) called the Global Country for World Peace? That it prints its own currency called Raam Mudra, and that it has its own transitional political party (the Natural Law Party)? This is just the aperitif. Don’t miss this perfect weekend read about one of the world’s greatest magicians, who gave up his livelihood for the bizarre movement that is TM. | The anti-wrestler: Donovan Danhausen is unlike any other professional wrestler. He is not 6-foot-7 and doesn’t weigh over 300 pounds. At 5-foot-10 and 175 pounds, the 31-year-old is physically unimposing. His signature move also doesn’t involve touching his opponents at all. Instead, he curses them by pointing both forefingers and bugging out his eyes. As Dan Brooks puts it in The New York Times, Danhausen “blurs the line between what is supposed to be real in the fictive world of pro wrestling and what is supposed to be his character’s own delusion.” Check out this piece on how Danhausen became professional wrestling’s strangest star | Fancy a chat with Socrates?: Or how about Billie Eilish, Tony Stark, Alan Turing, and even a New York City cat? In a world currently salivating over generative AI tools such as ChatGPT and Dall-E 2, Character.AI stands out for its virtual recreations of historical and fictional characters. The platform is co-founded by former Google researchers— one of whom is Daniel De Freitas, the person who created LaMDA, the Google chatbot once believed to be sentient. This story in The New York Times takes us through De Freitas’ journey and the wonder that is AI. It also warns us that you shouldn’t believe everything a bot tells you. | Chill dragon: The surprise and quick exit from the zero-Covid policy was the first indication that China has hit reset. It appears that this reset is more broad-based than just the response to the pandemic. After cementing his position as the paramount leader, Chinese President Xi Jinping has set a more conciliatory tone with western powers. Xi has also recalibrated the country’s approach to Russia, with which it had pledged limitless friendship. Financial Times reports that ‘Wolf Warriors’ have been sent to the boondocks as China cosies up to Europe. And countries such as Germany and France are responding warmly. While the immediate priority is to stabilise the economy, China also does not want to appear as a prickly pear to western powers. Trade with China is also beneficial to European countries, which are struggling with high cost of living. | Professional clickbaiters: Los Angeles-based YouTube stars Artsiom Kulik and Ashton Bingham would like to believe they are making the world a better place. They pride themselves on being scambusters, and run a channel called Trilogy Media on YouTube. The idea is simple: the duo talk to scammers on video and entertain viewers until things go south. Turns out that reality is worse than the idea, though. For one, the channel isn’t just haranguing people, but reinforcing stereotypes about Indians and even putting some victims out of work. This story in The Rest Of World explores the horrors of online vigilantism. | Still watching?: Netflix’s co-CEO Ted Sarandos, at one point, said that the streaming service wanted to become an HBO. Since then, it has come a long way. Today, Netflix wants to "replace all television". Its head of global TV, Bela Bajaria, has been entrusted with this assignment. Bajaria believes the ideal show is akin to a “gourmet cheeseburger”. She was assigned the demanding job by none other than co-CEO Reed Hastings. Since then, the streamer changed its course and rolled out bangers such as Squid Game and Wednesday. It’s also had its share of falls. In this profile of Netflix’s content overlord, The New Yorker offers a ringside view into streaming platform's hyper-aggressive approach to redefining entertainment. |
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