Data from the National Payments Corporation of India’s (NPCI) National Automated Clearing House (NACH) platform shows that failure rates for debit transactions which are used for recurring debit payments like equated monthly installements (EMIs) and insurance remained high at 30.27% by value inline with the 30.73% failure rates reported in May, indicating that easing of restrictions last month has not had a major impact on curing stress in the broader economy.
Analysts said the NACH data is an early indicator showing that the economy is still under some financial stress.
“Though the lockdown has not been that severe this time, unlike last year there is no moratorium for borrowers this year. Also, though the economic impact of the localised lockdowns has been contained the fact is we saw a higher amount of fatalities and infections in the second wave which means that it is possible that cash flows of borrowers may have been impacted due to hospitalisation expenses. All that must be reflecting in this early indicator,” said Karthik Srinivasan, group head, financial sector ratings, .
Analysts are awaiting the first quarter results of banks and non banking financial companies (NBFCs) to see if the high bounce rates will tickle down in the form of higher actual defaults in repayments.
The high failure rates in debit payments in June have surprised analysts who had expected it to come down as restrictions in economic activity had started to ease with the fall in infections. Bounce rates have increased above 30% in May and June after falling to 27.48% in April 2021 which was much lower than the 36.65% reported in April 2020. Though the rates are still higher than the pre Covid rate of 24.84% in January 2020.
Suresh Ganapathy, research analyst at Macquarie Capital Securities said the high failure rates in debit transactions could be an early indicator of stress in NBFCs.
“As per our conversations with rating agencies, collection efficiencies in general have been around 15% lower for NBFCs compared to levels seen in earlier quarter and June also has been a disappointing month in terms of collections. NACH debit transactions form less than 15% of collections for banks in general. Hence higher bounce rates are not necessarily an indicator of issues in retail asset quality. Our conversations with senior bank managements reveal that retail asset quality has been holding off very well,” Ganapathy said.
Srinivasan from ICRA said the high failure rates also could be a results of collections being hit as banks and NBFCs protected their staff from the risk of infections.
“Typically if a cheque or debit instruction bounces, lenders promptly approach the customer to either replace the instrument or change it altogether. This may have not been possible due to the precautions adopted by lenders. It remains to be seen whether we will see a sharp recovery like last year. A lot of questions will be answered after the first quarter results are out,” Srinivasan said.
Ganapathy from Macquarie expects a sequential pick up in delinquency rates due to lockdowns but he does not see any alarming increase in delinquency rates in the retail segment.