Sachet banking in digital India

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 lending landscape in the country, it could democratise access to formal credit. 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!

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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 Kishor Lodha, Chief Financial 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.

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