The Indian lending ecosystem is switching over into a colossal one. End-to-end digital solutions are displacing traditional ways of loan disbursement characterized, in most cases, by the abundance
of manual work, extensive approval processes, and a degree of inaccessibility. The
Open Network of Digital Commerce (ONDC) is one such revolution which is a government-led movement to democratize digital commerce and financial services.

Whereas ONDC is extensively known to transform the e-commerce sector, it also has a major potential in the financial services sector and notably by facilitating banks to lend out faster, small amount loans to individuals and small-scale companies. This blog discusses how ONDC is turning out to be a game changer in the lending industry and why banks must not miss this game changer.

What Is ONDC?

Open Network for Digital Commerce (ONDC) is an open, interoperable system, which aims to unbundle digital commerce out of the control of monopoly platforms. Rather than keeping customers confined to one particular app or any specific market, ONDC allows them to make easy transactions in any platform by encouraging standardization, transparency and easy accessibility.

In the financial services sector, ONDC can bring the financial institutions (bank, NBFC), fintech players, merchants, and customers into a decentralized financial ecosystem. This interoperability enables banks to access borrowers directly, determine credit worthiness on a real time basis and extend small value loans simultaneously with unequalled speed.

Why Small-Value Loans Matter Today

Loans of lower value, between 2,000 INR to 50,000 INR, are taken by individuals and small businesses to fulfill their urgent requirements of working capital, medical bills, personal consumption or spending. Such loans are:

  • Much demand : There are millions of small firms and newly established borrowers willing to obtain access to microcredit.
  • Traditionally underserved : There is a tendency of the banks to fear to process a small loan because of high costs of operations and low profitability.
  • Essential to financial inclusion : They unlock the capabilities of individuals and micro-entrepreneurs with no access to the traditional credit mechanisms.

Banks can kill these challenges and maximise the profitability of small-value lending by using ONDC.

How ONDC Transforms Small-Value Lending

  • Smooth Customer Onboarding

    • ONDC allows cross-platform compatibility to make customers onboarding easy and for banks. Check out access to credit options can be directly provided to the borrowers shopping at the ONDC enabled platforms. As an example, a small retailer can buy goods and immediately borrow a micro-loan under the ONDC ecosystem that does not require a visit to a bank branch.

  • Real Time Credit Analytics

    • Due to less credit history it is common in banks to have difficulties taking small-value loans in the bank. ONDC resolves this dilemma by offering the capability to access alternative data as a combination of prior transactions, merchant reputation, shopping habits, and repayment habits.

    Using this information and AI-powered analytics, banks will be able to assess credit automatically in real-time and approve the loan application in real-time as well. This removes default risks as well as providing access to credit to underbanked citizens.

  • Immediate Release of Loan

    • Through APIs, ONDC would enable speedier communication between the borrowers, lenders and merchants. Loans will be available immediately after being approved in digital wallets or a bank account. This enables borrowers to consume the credit in real-time at the network end-to-end digital loan utilization.

    This quality cuts the old turn around time of days or weeks drastically down to only a few minutes.

  • Reduce Operational Costs

    • Small-value loan processing is costly to the bank due to it being manually assessed. ONDC also automates loan origination, Credit Scoring, and disbursement with digital workflows. This saves much of the operational expenses and micro-lending becomes cost-effective to banks.

    A relatively low price implies that banks will have more room to accommodate more customers borrowing.

  • Increased Customer Experience

    • The customers are now used to slick digital experiences. Under ONDC, borrowers will have a zero-friction experience- application of loans to repayment. The ecosystem is also facilitated with, among others, digital KYC, e-signatures, and automated EMI deduction, which guarantees convenience and transparency.

    This customer-friendly procedure creates the sense of trust and makes people use it once again, which makes a bank maintain its clients in such a competitive environment.

  • Increasing Financial Inclusion

    • Arguably the greatest opportunity of ONDC is that it is opening credit access to previously underserved and unbanked communities. Digital commerce is actively excited by millions of small shopkeepers, gig workers, and entrepreneurs in rural areas who do not have formal credit history. This gap is filled by ONDC where banks reach these segments and bring services to where the financial services are needed.

    This has been a perfect democratization of the credit and is in conformity with the Indian objective of creating a financially inclusive economy.

    Key Benefits for Banks

    Using ONDC to access small-value lending, banks will be able to:

    • Widen their consumer groups beyond the conventional customer groups.
    • Find new sources of income through high turnover, and low-ticket size loans.
    • Optimize risk management by leveraging data-driven insight in real-time.
    • Encourage and empower their role as strong facilitators of financial inclusion.

    Challenges to Be Considered

    Although ONDC is a great source of benefits, there are also the challenges that banks will need to prepare:

    • Protecting data at the same time as maintaining privacy and security in an open network.
    • Development of good APIs.
    • Addressing possible credit risks that are caused by new-to-credit customers.
    • The process requires training personnel and updating systems that will be used to process ONDC operations.

      • Future-forward embrace of advanced analytics, AI-enabled fraud-detection and robust compliance systems will help banks evade these headaches.

    Final Thoughts

    The introduction of ONDC is not only the possibility to reshape digital commerce even more, it is also about the reshaping of financial services. In the case of banks, it offers a nonpareil opportunity to streamline and fast-track the process of releasing small-value loans, the segment that has been underserved traditionally.

    Through ONDC, banks will be able to save on costs, enhance experiences of their customers and can expose millions of potential borrowers who had never been a part of the formal credit system before. By doing so, not only do they empower their business models but also it goes towards giving India a bigger vision to attain financial inclusion and digital empowerment.

    Small-value lending of the future is quicker, smarter and more inclusive, and ONDC will be the engine of the transformation.