Auto-debit defaults rise amid COVID second wave

Out of every 100 auto-debit transactions made in the month of April, 34 failed. The latest retail payment data released by the National Payments Corporation of India (NPCI) shows that the "bounce rate" on auto-debit transactions, or auto-debits that did not clear, rose in April after the second COVID wave hit India.

These auto-debit transactions are captured by the National Automated Clearing House (NACH) debit platform. NACH processes auto-debit transactions for bank accounts for recurring payments like loan equated-monthly-installments (EMIs), utility bill payments, and insurance premiums. So the NACH platform is largely used to collect payments for loans, investment in mutual funds, and insurance premiums. But the largest chunk of these transactions, about 80 percent, are for EMIs alone.

In April, the bounce rate stood at 34.05 percent, higher by 130 basis points compared to 32.8 percent in March. To be sure, this is not the highest default rate on auto-debit transactions since COVID hit. Bounce rates in June went up to as much as 45.37 percent of total transactions, before starting to decline to about 36 percent in January this year, and 32.8 percent in March.

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"NPCI-NACH debit (recurring payments (EMI, insurance premium, etc.) return % reached a peak in June 2020 and has been on a declining trend since then. The % return (value terms) has declined to 27.5 percent in March 2021 from the peak of 38.1 percent in June 2020. Even the volume percentage has declined to 32.8 percent from 45.4 percent during the same period. With various restrictions at state/district level imposed during April, it is yet to be seen whether it affects the recurring payments going forward," noted Soumya Kanti Ghosh, Chief Economist at State Bank of India.

The April 2020 default rate was even higher, at about 38 percent. But the current rate of 34.05 percent still remains above the pre-Covid level. For instance, the bounce rate in April 2019 stood at 27.7 percent, in April 2018 at 22.3 percent, and at 21.4 percent in April 2017. It must be kept in mind that collections in April are usually low as it is a seasonally weaker month.

But there are limitations to this data. For instance, the NACH platform only captures auto-debit data. It does not factor in other sources of payments such as cheques or cash.

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Secondly, this data may not necessarily include unique representations, and every bounce for a borrower can be counted multiple times. Thirdly, the cure rate for such transactions is also very high, which means if the borrower has insufficient funds in the account and the bank follows up with them to rectify the situation, borrowers tend to comply.

Thus, it would be too simplistic to draw a conclusion about the retail asset quality on a bank's balance sheet just by looking at this data. However, it is an important indicator of the rise in financial strain for small borrowers.

So far, banks and NBFCs that have reported earnings have indicated through their commentary that collection efficiencies in April will not be hit as much as last year. Bandhan Bank, for instance, said collections were hit by as much as 3-5 percent in April because of localised lockdowns across the country. But other NBFCs have indicated a 5-10 percent hit in April collections due to the second wave of infections.

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Banking expert Suresh Ganapathy of Macquarie said in his note recently, "Anecdotal evidence reveals that, from a financial impact perspective, things aren't as bad as last year. Banks and NBFCs and their borrowers are equipped to deal with a lockdown-like situation much better. While collections for NBFCs have dropped 10 percent as per media reports, the issue this time around is that a lot of staff or their family members are affected by COVID. So that is also hampering collections. Banks have been saying that collections have been ok and not materially affected."

The actual impact of the rising infections will be seen after lenders report their first-quarter earnings, which will capture data from April to June, which is when the bulk of the hit is likely to be seen. Meanwhile, the NACH data may be a good proxy to understand how this pandemic resurgence has increased the financial strain for individual borrowers.