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

NACH data shows that of 86.6 mn transactions in October, 27 mn or 31.24% failed while 59.52 mn went through; In value terms, 24.83% of the transactions declined in October, lowest since Jan 2020

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

According to the NACH data, in October, of the 86.6 million transactions initiated, 27 million transactions, or 31.24 per cent, failed, while 59.52 million were successful.

In value terms, 24.83 per cent of the transactions declined in October — the lowest since January 2020. In September, bounce rates stood at 31.7 per cent in volume terms, 25.4 per cent in value terms. Just before Covid-19 reared its ugly head, the bounce rate for February 2020 stood at 31.5 per cent and 24.9 per cent in volume and value terms, respectively.

The unsuccessful auto-debit requests through the NACH platform are generally referred to as bounce rates.

“This indicates a continuation in trend of collection recovery as witnessed in the second quarter (Q2) of 2021-22 (FY22) for major banks. With strong sales during Diwali season and a surge in economic activity across sectors, bounce rates can further reduce,” said Suresh Ganapathy, associate director, Macquarie Capital.

“These bounce rates were at similar levels seen during pre-Covid months of January and February of 2020 and by value, 260 basis points (bps) better than January-March 2021 period, which was the best quarter last year in terms of recovery for the economy. On a month-on-month basis, bounce rates have declined 50-60 bps by volume/value, which is encouraging,” he added.

NACH, a bulk payment system operated by the National Payments Corporation of India, facilitates one-to-many credit transfers, such as payment of dividend, interest, salary, pension, etc, as also collection of payments pertaining to electricity, gas, telephone, water, periodic instalments towards loans, investments in mutual funds, insurance premium, etc. These are applicable for inter-bank mandates or between a bank and non-banking finance company (NBFC) or financial technology (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 festival season. This is a good trend and bounce rates should go down further. 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 lenders and around 50-60 per cent of the restructured book is under moratorium. Once that comes out of 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 from December 2020, indicating higher regularity in equated monthly instalments, utility, and insurance premium payments by consumers. However, the trend reversed in 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 past 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.

“With lockdown restrictions easing and several sectors returning to pre-Covid levels in Q2FY22, many banks witnessed strong recovery in collections. Banks slippage ratios reduced substantially by 100 bps quarter-on-quarter on average in Q2FY22. We expect the asset quality situation to improve further, driven by reduction in retail, as well as small and medium-sized enterprises’ non-performing loans in the coming quarters,” said Ganapathy.

Experts have said bounce rates were at elevated levels even before the pandemic struck because of economic slowdown. If April 2019 numbers are any indication, 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, it gives an indication, directionally. NBFCs and fintechs have seen huge growth, with digital lending coming in and these segments attracting a newer and different set of customers, who might not be the most attractive when it comes to risk. That might be one of the reasons for the bounce rate to be on the higher side.

In 2020-21, unsuccessful auto-debit requests via NACH constituted 38.91 per cent of the total auto-debit requests. In 2019-20, they were 30.3 per cent. In 2018-19, they were 23.3 per cent.