Second COVID wave impact: Auto-debit bounce rates continue to rise in May

Auto-debit transaction failures continued to rise in the month of May, indicating a potential rise in stress for retail borrowers, the latest data released by the National Payment Corporation of India (NPCI) showed.

Data for the month of May showed that bounce rates had risen to 35.9 percent in volume terms, and 30.7 percent in value terms amid the hit to economic activity due to the surge in coronavirus infections. Bounce rates show the auto-debit transactions that did not clear. In April, bounce rates stood at 34.1 percent in volume terms, and 28 percent in value terms. In other words, there was a 180 basis points rise in auto-debit transaction failures in volume terms, and 270 basis points in value terms. This is also much higher than pre-COVID levels, with bounce rates in May 2019, for instance, at 27.8 percent.

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-instalments (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.

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.

In volume terms, bounce rates for May 2021 (35.9 percent) were lower than May 2020 (36.4 percent), and this is understandable if one assumes that the nature of lockdowns was more drastic last year and so was the resultant hit to economic activity.

However, what’s surprising is that in value terms, the bounce rates for May 2021 (30.7 percent) are higher than May 2020 (30.3 percent), when moratorium was also in play for retail borrowers. Experts believe that a higher retail credit push by non-bank lenders over the past few years may also be the reason for the overall rise in bounce rates, as their borrowers' credit profile also tends to be weaker.  So far, non-banking financial companies have reported a 10-15 percent dip in collection efficiencies which could have impacted the May 2021 numbers, Suresh Ganapathy of Macquarie wrote in a recent note.

On the other hand, large banks like HDFC Bank had indicated that May saw an improvement over April, and June was expected to be even better. “while bounce rates have held up this time around despite dropping marginally in April, collection efficiencies (particularly in the hard-touch segments) are already witnessing improvement in May and catch up is likely to be faster in June,” the bank said in a call with Goldman Sachs recently.

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

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.