Credit where it’s due

India's digital public infrastructure is at it again. After revolutionizing payments with UPI, it's now targeting the country's credit conundrum. But unlike UPI's meteoric rise, these new platforms are still finding their footing. Let's dive into what's really happening.

First, the players:

• Unified Lending Interface (ULI)

1. Announced by RBI last week, ULI aims to standardize the lending process. It's designed to create a seamless flow from loan application to disbursement, potentially reducing the time and paperwork involved in getting credit. The target? Everyone from individual borrowers to small businesses.
2. It works by creating a standardized protocol for lenders and loan service providers to communicate. It allows for real-time exchange of information, from KYC details to credit scores, making the entire process faster and more efficient. For borrowers, this means quicker loan approvals and potentially better terms as lenders can assess risk more accurately. For lenders, it opens up a wider pool of borrowers and reduces operational costs.

• Open Credit Enablement Network (OCEN)

1. Think of OCEN as a digital bridge connecting lenders and borrowers. Its primary objective is to democratize credit access, especially for MSMEs. By standardizing loan serviceability, OCEN could allow even your neighborhood kirana store to become a potential loan origination point.
2. It operates as a set of open APIs that allow any technology platform to plug in and become a loan service provider. This means a small business owner could potentially apply for a loan through their accounting software or e-commerce platform. The system uses data from various sources to create a comprehensive credit profile, enabling lenders to offer more tailored products. For MSMEs, this could mean access to credit based on their cash flow rather than traditional collateral.

• Open Network for Digital Commerce (ONDC):

1. While primarily an e-commerce platform, ONDC is dipping its toes into credit. It's working on onboarding NBFCs to provide extended credit facilities to both buyers and sellers on the platform. The goal? To grease the wheels of digital commerce with easier access to credit.
2. With ONDC, the credit aspect works by integrating lending services directly into the transaction flow. For sellers, this could mean instant access to working capital based on their sales history on the platform. For buyers, it could offer options like 'buy now, pay later' seamlessly integrated into their shopping experience. The key benefit is that it brings formal credit to a segment of the market that traditional banks often overlook, potentially boosting both sales and financial inclusion.

Why does India need this?

India's credit-to-GDP ratio stands at a modest 56%, compared to China's 182% and Brazil's 114%. This isn't just a number game. It means that for every rupee of economic output, India has less than half the credit availability of China. The implications? Stunted business growth, limited consumer spending, and a handbrake on economic potential.

The credit gap for MSMEs alone was estimated at $330 billion in 2019. That's not just a gap; it's a chasm. It means millions of small businesses struggle to get the capital they need to grow, innovate, and create jobs. In a country where MSMEs contribute 30% to the GDP, this is a critical bottleneck.

These platforms are the government's attempt to bridge this gap. While private players focus on profit-friendly segments, these initiatives aim to create a rising tide that lifts all boats. It's an ambitious play, reminiscent of UPI's transformative impact on digital payments.

Adoption Challenges and Lack of Transparency

But here's where things get murky. Despite the fanfare, concrete data on adoption and impact is scarce. ONDC, for instance, has been live for over a year, but finding reliable transaction volumes is like searching for a needle in a digital haystack. Even businesses integrated with ONDC seem to be in the dark about actual usage. It's a black box that's raising eyebrows.

OCEN, too, is still more promise than practice. While the framework exists, widespread adoption remains elusive. The government's silence on pilot data isn't helping. It's like they've built a shiny new expressway but forgot to put up the road signs.

Contrast this with UPI's rollout. Remember the armies of bank representatives descending on local markets, armed with QR codes and smartphones? That wasn't just enthusiasm; it was a coordinated ground game. Banks conducted over 100 million customer engagements to drive adoption.

Moreover, the government launched a massive digital and television campaign to promote UPI. The "Digital India" initiative became a household name, with celebrities endorsing digital payments in prime-time advertisements. The campaign, which ran across multiple languages and media platforms, reached an estimated 400 million Indians. It wasn't just about awareness; it was about building trust in a new financial ecosystem.

The future needs to be credit-driven

These new credit platforms need a similar push. You can't expect a small business owner juggling a dozen responsibilities to spontaneously embrace digital credit. It requires handholding, education, and incentives. The government needs to shift from infrastructure-building to adoption-driving, and fast.

The potential is undeniable. If India can replicate UPI's success in credit, it could unleash a wave of entrepreneurship and consumption that transforms the economy. But potential alone doesn't pay bills or fund businesses.

As founders and investors, we need to watch this space closely. These platforms could redefine how businesses access capital and how consumers spend.

If you know of businesses using ONDC or OCEN infrastructure, please write back to us - we’d love to hear real stories and understand it’s impact deeply!