Auto-debit bounces slide to lowest since start of pandemic

These levels mark the lowest failure rates on auto-debit requests since the beginning of the pandemic in March 2020.

Management commentary on the impact of the third wave and consequent disruption will be critical.

The share of failed auto-debit requests on the National Automated Clearing House (NACH) platform eased to 29.97% in volume terms in December 2021 from 31.22% in the previous month. In value terms, the bounce rate stood at 24.42%. These levels mark the lowest failure rates on auto-debit requests since the beginning of the pandemic in March 2020.

Data from the NACH platform does not include intra-bank transactions and therefore is not representative of all debit requests made in the financial system. EMI payments to smaller non-banking financial companies (NBFCs) and fintechs account for a sizeable share of requests made through the NACH platform.

According to data released by the National Payments Corporation of India, of the 93.79 million debit requests made in December over the NACH platform, 28.11 million bounced. In terms of value, of the requests for `90,425 crore, declines were to the tune of `22,078 crore.

Stress in the consumer segment has been falling ever since the second Covid-19 wave started to recede in June 2021. The trend of improved repayments was reflected in auto-debit bounce rates throughout the second half of 2021. However, it is yet unclear how the third wave, which set in towards the end of December, will impact asset quality at banks and other lenders.

Analysts say the December quarter has been a strong one in terms of collections for lenders. ICICI Securities said in a recent note that with lower slippages and improving collections and recoveries, there could be an improvement in the overall stress pool and credit cost for banks. At the same time, the behaviour of the emergency credit line guarantee scheme (ECLGS) lending pool and the restructured portfolio will be closely watched.

“Management commentary on the impact of the third wave and consequent disruption will be critical. If intensity of the third wave rises, normalisation to steady state credit cost will still be some quarters away,” ICICI Securities said.

Moreover, improvement in banks’ credit quality is being supported heavily by restructuring. Some restructured loans could start to sour as the dispensations associated with them are rolled back. According to rating agency Icra’s estimates, the restructuring under the second Covid resolution plan, which was available for retail and micro, small and medium enterprises (MSME) borrowers, stood at 3x the restructuring under the first round in 2020. The restructuring also led to the upgrade of accounts which would have slipped earlier.

Anil Gupta, vice president – financial sector ratings, Icra Ratings, said with the increased spread of the new Covid-19 variant, there is a high possibility of the occurrence of a third wave. “As banks restructured most of these loans with a moratorium of up to 12 months, this book is likely to start exiting the moratorium from Q4FY22 and Q1FY23,” Gupta said. “Therefore, a third wave poses high risk to the performance of the borrowers that were impacted by the previous waves and hence poses a risk to the improving trend of asset quality, profitability, and solvency.”

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