The ‘bounce rate’ on auto-debit transactions, or auto-debits that did not clear, has remained elevated over the last few months. Between April and October 2020, the bounce rate on debit transactions via the National Automated Clearing House (NACH) on average stood at  40.4% in volume terms and 33.5% in value terms, in comparison to 29% and 23%, respectively, during the same period last year, according to data from the National Payments Corporation of India (NPCI).

As the Reserve Bank of India (RBI) announced a six-month moratorium on loan repayments for borrowers between April and September this year as part of its COVID-19 regulatory package, October is the first month where all borrowers had to pay their loan instalments. The NACH debit platform, operated by NPCI, processes auto-debit transactions for bank accounts for recurring payments like loan equated-monthly-instalments (EMIs) and insurance premiums. At least 80% of the NACH debit transactions take place for loan repayments.

The NPCI publishes data on the number of NACH debit “presentations”, or the amount of debit transactions that are initiated against the customers’ account at the start of a month, and NACH debit “returns” which are transactions that did not complete. The bounce rate is calculated based on the proportion of returns to total presentations.

The bounce rate on NACH debit transactions had been slowly rising beginning in May last year. But in the wake of the COVID-19 pandemic, the bounce rate grew to a historical high of 45.4% in volume and 38% in value terms in the month of  June 2020. As of October this year, the bounce rate on NACH debits stood at 40.1% in volume and 32.4% in value terms compared to 31.5% and 25%, respectively, in February 2020.

‘Credit discipline has reduced’

A senior banker explained that the NACH debit platform is used when borrowers do not have a bank account within the same bank, or between a non-bank lender and borrower, whereas if the borrower takes a loan from a bank where they have a bank account the auto-debits take place automatically within the bank. “In June, we saw many borrowers withdraw money from their accounts that were linked to the NACH platform for auto-debits, perhaps because they saw a loss of income and required the money,” this person said on the condition of anonymity.

Though the bounce rate has decreased since June and most moratorium customers are now back to repaying their loans, there are still many stressed customers, particularly in the self-employed segment, who cant repay their EMIs and may opt for loan restructuring, the banker quoted above said.

For instance, around 2,600 personal loan customers and 4,291 home loan customers of the State Bank of India have requested for loan restructuring under the RBI’s framework, aggregating 1,300 crore.

Prakash Agarwal, director and head of financial institutions at India Ratings and Research told MediaNama that there could be many factors that could be leading to this: “One, credit discipline could have reduced in the market, two, there is a obvious cash flow mismatch which is leading to borrowers having insufficient funds and three, some lenders are could be debiting cheque or the NACH mandate in the assumption that borrower may have money in the account in case borrower has not explicitly asked for moratorium,” he said. Since NACH debits is mainly used by non bank lenders, we are mainly seeing higher bounce rates at fintech lenders and non bank lenders who mainly provide unsecured loans, Agarwal said.

“Between April to September, lenders would have added new borrowers and grown their loan portfolio while auto-debits on moratorium accounts would have been stopped. So the stabilization of the bounce rate does not indicate higher loan defaults in the system, post the moratorium ending, but that some of these auto-debit transactions may have failed because some borrowers have opted for loan restructuring,” says Akshay Mehrotra, Chief Executive Officer and Co-Founder at EarlySalary and Founding Member of the Fintech Association for Consumer Empowerment (FACE).

Are borrowers stressed ?

“Since there have been job losses or a loss of income for borrowers, the auto-debit bounce rate should be higher. So maybe the banks are aggressively pursuing loan restructuring which would help keep the numbers down or maybe people have some bank balance, or savings since April in their account, so their auto-debit transactions will have gone through at least in October,” says Parijat Garg, a consultant  and former executive with a credit bureau. He says that as the economy has opened up many self-employed borrowers are seeing improvements in their earnings.

“But if we assume that these auto-debits that went through took place because borrowers have saved some money to make at least one or two EMI payments, but if they are still stressed, my expectation is that the bounce rate could rise in the next few months,” he said.

In an October 2020 report, CreditVidya said that while consumption has improved by 0.2% in September compared to the pre-COVID period, earnings are still be the pre-COVID levels by around 1.5%. However, the average monthly bank balances improved by 1.6% above the pre-COVID levels, it said.

“Nearly 15-18% of out salaried customer portfolio has seen either a loss of pay or reduction of pay, specifically borrowers in physical retail, travel and hospitality sectors were significantly affected by the pandemic. We are salary advance partners with over 500 companies and for a handful of companies we had to pause lending temporarily. But as the economy is opening up we see comfort further,” Mehrotra said.

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