How ONDC Plans To Disburse MSME And Unsecured Personal Loans — BQ Exclusive

The Open Network for Digital Commerce is planning to roll out its credit services for individuals and sole proprietors from late October, according to two people with direct knowledge of the matter, who spoke on the condition of anonymity.ONDC will start with lending towards unsecured personal loans, and goods and services tax-based lending for micro, small and medium enterprises. While the specifications for this category are expected to be officially announced in the first week of September, the first set of credit availability options for people are expected from late October or early November, the first person quoted above said. In early August, ONDC released a blueprint on developer platform GitHub on how financial services could come up on the platform. The government-backed network’s official website also shows gift cards, credit, insurance, and FastTag as upcoming categories under the domain. The platform will also host mutual funds as another category in the near future. Its specifications are expected to be sent to participants for feedback in the first week of September, the first person said. For insurance, the specifications will be sent to the participants next week, the person said. After the company gets feedback from participants, the products will be rolled out. .The platform enables an institution to participate as either a buyer app, seller app, technology service provider, and/or reconciliation service provider. For the purpose of credit, the first two are the most important. .Unsecured Personal LoansA buyer seeking credit to purchase goods or services would log in via the buyer's app.The buyer would be assessed based on bank statement data available via account aggregators and credit bureau data.The buyer would then be prompted to enter preliminary information like name, PAN, etc., which would be forwarded to seller apps or loan providers. The buyer would then be able to pick one of the options issued by the lenders. After completion of formalities, the lender would disburse the credit into the customer's account and the loan document would be sent via email or as a link on the buyer's app.The customer would also be able to access information like loan status, schedule, payment due date, prepayment options, etc., from the buyer's app..For MSME financing, the assessment is based on GST invoice data, bank statement data with the account aggregator and credit bureau data.Since the loan products would be embedded in the buyer's app, the latter would be eligible to earn a fee on the sale of a product. The seller app, in turn, would pay ONDC a network fee, which in the case of credit would be 25 basis points annualised per converted loan. The decisions like cost of credit, repayment cycle, etc., will be taken by the lenders themselves, with ONDC merely enabling the transaction, the second person quoted above said..“India’s loan-to-GDP ratio hovers between 18-20%. When you compare it with economies like Malaysia and Thailand, we are far behind,” said Monish Anand, founder and chief executive officer, MyShubhLife—a full-stack financial services company providing merchant and salaried loans through its digital lending app.While the demand for credit has always existed, access to it has been a challenge. However, with the emergence of fintechs and digitisation efforts, things have eased, he said. “If you look at traditional banks and NBFCs, their products and credit are mostly designed for the top 10%. But in the last couple of years, fintechs and digitisation of traditional entities have been revolutionary and short-term loans, especially for consumption purposes have become very popular,” Anand said. In FY23, the fintech industry disbursed loans worth Rs 92,267 crore, up 21% year-on-year, as compared with Rs 76,396 crore in FY22, according to a report published by the Fintech Association for Consumer Empowerment and Equifax. In absolute terms, the number of loans disbursed in FY23 increased to 7.10 crore, up 49% year-on-year, compared with 4.77 crore in FY22..This demand for credit, especially small ticket-sized loans, is only expected to rise in the future. The FACE and Equifax report also showed that the share of small duration loans—less than six months—increased in FY23, reaching 88% of the disbursement volume, as compared with 63% in FY22."India is a young country with almost 450 million people below the age of 20. This means that in the next 10 years, there will be around 200 million people coming into the workforce at different levels and this is where the future lies," said Anil Pinapala, founder and CEO, FlexPay by Vivifi India Finance—an RBI-certified non-banking finance company providing sachet-sized loans to customers."There will be a huge demand of credit from this workforce and we do see our industry having an edge because this is a digital-native population," he said..The cost of credit and chances of delinquencies however remain higher in digital loans disbursed by fintech firms."The interest rates tend to be high because it is a function of risk. These short-term loans are mostly used for discretionary spends. It is important to get the risk-based pricing mix right," Anand of MyShubhLife said."Historical data shows that short-term loans come with high delinquencies. For every Rs 100 lent in a quarter, 6-7% is lost. So, there is a market and if players can figure out a way to lower the interest rates, there is a lot of scope," said Anand.

How ONDC Plans To Disburse MSME And Unsecured Personal Loans — BQ Exclusive

ONDC's next foray will be in small value credit. But how does it work?

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