Auto-debit figures blow holes in loan recast story

India’s retail borrowers are still to find their feet as seen from the failure of a large number of auto-debit transactions in October, underscoring growing stress in the banking system from the pandemic-induced turmoil despite the six-month moratorium on loan repayment.

Such automatic payments are recurring by nature wherein the borrower agrees to an auto-debit mandate, and the loans are drawn on a monthly basis from a bank account.

According to the latest data on auto-debit transactions on the National Automated Clearing House (NACH) platform, as much as 40.1% of auto-debit transactions by volume in October have failed largely due to insufficient funds worsening from a bounce rate of 31.5% in February. The percentage of failure during this period was only a tad higher in September at 40.8%, the data showed, indicating the prevailing economic distress among small borrowers.

The bounce rate slightly increased between September and October when seen in terms of value of transactions. While 31.7% of these recurring payments, including EMIs), insurance premiums, among others failed in September by value, the number was 32.2% in October. What could have had an effect on the repayment trend is the inconclusiveness of the Supreme Court on interest payment during the recent moratorium period that ended August 31. However, as directed by the RBI and the government, lenders have already credited the difference between compound and simple interest in borrower accounts by November 5.

The bounce rate data is in sharp contrast to the narrative of improved collection efficiencies offered by banks so far. Large banks like HDFC Bank and SBI disclosed in their September quarter earnings commentary that their collection efficiencies were much above 90%. Experts have been baffled by the disconnect between the data and the optimism projected by banks. “There is a disconnect and I do not think we will be able to get reasonable clarity before the Q3 and Q4 numbers are in. I would say it is a bit of a wait-and-watch, but there is certainly a divergence between the auto-debit bounce data and the collection numbers reported by lenders,” said Saswata Guha, director, Fitch Ratings. Guha said even the number of recast requests being disclosed by banks is much lower than what was being anticipated.

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