Auto debit bounce rates drop further in October to touch pre-Covid levels

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Auto debit bounce rates drop further in October to touch pre-Covid levels

Auto debit bounces have come down further in October, with the value and volume of unsuccessful auto-debit requests through National Automated Clearing House (NACH) reaching pre-Covid levels. This validates the claims made by the lenders regarding the significant improvement in collection efficiencies they have seen in the past few months.

As per NACH data, in October, of 86.6 million transactions initiated, 27 million or 31.24 per cent transactions failed while 59.52 million were successful. In value terms, 24.83 per cent of the transactions falied, the lowest since January 2020. Unsuccessful auto-debit requests through the NACH platform are generally referred to as bounce rates.

“This indicates a continuation in trend of collections recovery as witnessed in 2QFY22 for major banks. With strong sales during Diwali season and a surge in economic activity across sectors, bounce rates can further reduce in our view”, said Suresh Ganapathy, Associate Director, Macquarie Capital.

“These bounce rates were at similar levels seen during pre-Covid months of January 2020 and February 2020 and by value, about 260 bps better than the Jan-Mar 2021 period which was the best quarter last year in terms of economic recovery. Month-on-month, the bounce rates have declined 50-60 bps by volume/value which is encouraging,” he added.

In September, bounce rates stood at 31.7 per cent, in volume terms and 25.4 per cent in value terms.

NACH, a bulk system operated by the NPCI, facilitates one-to-many credit transfers such as of dividend, interest, salary, and pension, as also collection of payments pertaining to electricity, gas, telephone, water, periodic installments towards loans, investments in mutual funds, insurance premium, among other things. These are applicable for inter-bank mandates or between a bank and NBFC or fintech lender.

Anil Gupta, Vice President–Financial Sector Ratings, Icra, said, “Bounce rates have touched pre-covid levels, both in volume and value terms as earnings and cash flow increased because of a bounce back in economic activity around the festive season. This is a good trend and bounce rates should go down further, going forward. It will lead to lenders incurring less expenditure on collections and focus more on business. Having said that, a lot of restructuring has been done by the lenders and around 50-60 per cent of the restructured book is under moratorium. Once that comes out of the moratorium, the bounce may inch up.”

After seeing record numbers between June-November last year, highlighting the stress in the system, bounce rates started coming down since December 2020, indicating higher regularity in equated monthly instalment (EMI), utility, and insurance premium payments by consumers. However, the trend reversed since April as bounce rates inched up due the second wave of the pandemic. Again, in July, the trend reversed, and bounce rates started declining as the impact of the second wave started waning.

Lenders have indicated in their earning calls that their collection efficiencies have gone post the April – June quarter and they have been able to pull back the slippages they had seen in the retail segment with economic activity picking up post the devastating impact of the second wave of the pandemic.

“With easing of lockdown restrictions across the country and several sectors returning to pre-Covid levels during Q2FY22, many banks witnessed a strong recovery in collections. Banks slippage ratios reduced substantially by 100bps QoQ on an average in Q2FY22. We expect the asset quality situation to improve further driven by reduction in retail as well as SME NPLs in the coming quarters,” Ganapathy said.

Experts have said bounce rates were at an elevated level even before the pandemic hit, because of the slowdown in the economy. If we see April 2019 numbers, the bounce rate stood at 27.7 per cent and 22.2 per cent.

While bounce rates may not be the most precise barometer of stress in the system but it gives an indication, directionally. According to experts, auto-debit transactions through NACH constitute less than 15 per cent of collections for banks. Hence, a higher bounce rate may not necessarily indicate a higher degree of stress in the retail asset portfolio of banks. On the contrary, a higher bounce rate may indicate higher stress in the NBFCs portfolio. NBFCs and fintech have seen huge growth with digital lending coming in and these segments attract a newer and different set of customers, who might not be the most attractive set of customers when it comes to risk and that might be one of the reasons for the bounce rate to be on the higher side as the customer profile of NBFCs.

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