5 Ways ONDC’s Financial Services are Revolutionizing Access to Credit for MSMEs

The Open Network for Digital Commerce (ONDC) is revolutionizing the landscape of financial services in India, particularly for micro, small, and medium enterprises (MSMEs). As a government-backed initiative designed to democratize e-commerce, ONDC’s latest foray into financial services aims to enhance cash flow, improve access to credit, and foster financial inclusion for small businesses across the country. This article delves into the various aspects of ONDC’s financial services, including their impact on cash flow, specific offerings, data security measures, the role of technology service providers, and competitive positioning against existing digital lending platforms.

Enhancing Cash Flow for Small Businesses

ONDC’s financial services are set to significantly improve the cash flow of small businesses through several key mechanisms:

• Instant Loan Approvals: One of the standout features of ONDC’s financial services is the introduction of fully digital, paperless working capital loans that can be approved in just six minutes. This rapid access to funds allows MSMEs to manage operational expenses and invest in growth opportunities without the lengthy delays typical of traditional lending processes.
• Diverse Financial Products: ONDC plans to offer a range of financial products tailored specifically for MSMEs. These include working capital loans, GST invoice financing, and purchase financing. By providing timely funds based on actual business transactions, ONDC addresses the liquidity challenges that many small businesses face.
• Data-Driven Credit Assessment: Utilizing detailed transaction data enables ONDC to assess the creditworthiness of MSMEs more accurately. This data-driven approach reduces the risk associated with lending to smaller businesses, making it easier for them to secure loans and manage cash flow effectively.

Specific Financial Products Offered by ONDC

ONDC is set to provide several financial products aimed at supporting the unique needs of MSMEs:

• Working Capital Loans: Designed to help businesses cover their day-to-day operational costs, these loans provide essential liquidity.
• GST Invoice Financing Loans: These loans allow MSMEs to borrow against their GST invoices, providing immediate liquidity and helping businesses manage cash flow more effectively.
• Purchase Financing: This product assists MSMEs in financing their purchases, ensuring they have the necessary funds to acquire inventory or equipment without straining their cash flow.
• Insurance Products: ONDC plans to introduce various insurance offerings, including marine, health, motor, and life insurance, which can further support MSMEs in managing risks associated with their operations.

Ensuring Data Security and Privacy

As ONDC expands its financial services, ensuring data security and privacy is paramount. The network is committed to implementing robust measures to protect sensitive information:

• Integration of Secure Technologies: ONDC utilizes technologies such as Account Aggregators for data management, Digilocker or Aadhaar for KYC (Know Your Customer) verification, and Aadhaar eSign for secure agreement signing. This integration helps safeguard sensitive information throughout the loan application process.
• Compliance with Regulations: ONDC adheres to data protection regulations and best practices to ensure that user data is protected at all levels of operation, maintaining privacy and trust among its users.

Role of Technology Service Providers

Technology service providers are integral to ONDC’s financial ecosystem, playing several key roles:

• Facilitating Integration: They help integrate various digital systems, enabling seamless interactions between MSMEs, lenders, and financial services.
• Enhancing User Experience: By providing user-friendly platforms, technology service providers improve the overall experience for MSMEs seeking financial assistance.
• Data Management and Analytics: These providers assist in managing and analyzing transaction data, which is vital for assessing creditworthiness and tailoring financial products to meet the specific needs of MSMEs.

Competing with Existing Digital Lending Platforms

ONDC’s financial services model is designed to compete effectively with established digital lending platforms through several strategic advantages:

• Faster Loan Processing: The six-minute loan approval process is a significant advantage over traditional lending platforms, which often have longer processing times.
• Lower Operational Costs: By leveraging digital technologies, ONDC reduces operational costs, allowing it to offer competitive interest rates and terms that appeal to MSMEs.
• Focus on Financial Inclusion: ONDC’s commitment to enhancing financial inclusion for MSMEs sets it apart from many existing platforms that may focus primarily on larger businesses or those with established credit histories.
• Diverse Product Offerings: The range of financial products tailored specifically for MSMEs, including innovative options like GST invoice financing, provides a unique value proposition that addresses the specific needs of smaller businesses.

Future Plans and Expansion

In the next 18 months, ONDC plans to significantly expand its financial services offerings. The network aims to:

• Launch GST invoice financing loans by the end of September 2024.
• Introduce purchase financing for individuals and sole proprietors, as well as working capital lines for partnerships and private limited companies.
• Launch insurance products, including marine, health, motor, and life insurance.
• Unveil mutual fund offerings.
• Partner with Mastercard to offer credit card products on the network.

 

The leadership of ONDC has expressed strong optimism and commitment regarding the launch of its financial services, emphasizing the potential impact on small businesses and the broader economy. Here are some key quotes from ONDC’s leadership concerning this new initiative:

T Koshy, CEO of ONDC

1. On the Launch of Digital Loans:
   “By integrating multiple digital systems into a single process, we are simplifying the borrowing experience and expanding credit availability even for remote and underserved regions. This innovation not only reduces operational costs for both lenders and buyer applications but also enhances financial inclusion, fostering economic growth and opportunity across the country.”
2. On Financial Inclusion:
   “Our fully digital and paperless loan service allows customers to access loans in just six minutes. This is a significant step forward in providing quick and easy access to funds, particularly for small businesses that often struggle with traditional lending processes.”
3. On Market Dynamics:
   “The ONDC network is a medium to prevent market concentration and democratizes access for all sellers. It enables any buyer to get the best possible deal for goods or services, contrasting with typical platforms that favor large suppliers and marginalize smaller businesses.”

Hrushikesh Mehta, Senior Vice President for Financial Services at ONDC

1. On Collaboration with Mastercard:
   “We have a community volunteer program, and if a certain company wants to help build protocol, we hold the reins and understand that we will release it to the public. Just got Mastercard who is now willing to be the volunteer and build protocols for credit card rollout.”
2. On Future Financial Products:
   “We are excited about our plans to introduce insurance and mutual fund products. Our goal is to hit 100-200 transactions initially, and we are committed to expanding our offerings to meet the needs of MSMEs.”

Vision for the Future

ONDC’s leadership is focused on creating a comprehensive financial ecosystem that not only addresses the immediate needs of small businesses but also fosters long-term economic growth. They aim to leverage technology to democratize financial services, ensuring that underserved segments of the population receive the support they need to thrive.These statements reflect ONDC’s strategic vision to enhance financial accessibility and inclusion for small businesses, ultimately contributing to a more equitable digital commerce landscape in India.

 Conclusion

ONDC’s entry into the financial services sector marks a significant milestone in its mission to democratize e-commerce and enhance financial inclusion in India. By providing instant loans, diverse financial products, and a commitment to data security, ONDC is poised to empower small businesses and drive economic growth across the country. As the network continues to scale up its operations and innovate its financial offerings, it will play a crucial role in shaping the future of digital commerce and financial services in India, ultimately transforming the landscape for MSMEs and fostering a more inclusive economy.