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Covid surge may upend drop in auto-debit payment failure

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The sharp surge in covid-19 cases and resulting local restrictions being implemented across states is likely to lead to a pickup in auto-debit payment bounces, which had been declining over the last few months.

As covid-19 wreaked havoc on the economy last fiscal, a larger number of small borrowers were unable to repay loans, resulting in a near-9 percentage point increase in auto-debit bounces in FY21, showed data from the National Payments Corp. of India (NPCI).

While there has been some recovery in the four months to March 2021, the fresh wave of covid-19 threatens to mar it. In FY21, 38.9% of auto-debit transactions conducted through the National Automated Clearing House (NACH) failed, primarily because of insufficient funds. The volume of failures was at 30.3% in FY20 and lower at 23.3% in FY19, the data showed.

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This data does not reflect intra-bank standing instructions and is only for interbank mandates and those between a bank and a non-bank lender. These are recurring payments where borrowers have agreed to auto-debit mandates and funds are drawn on a monthly basis from their bank accounts.

In value terms, 31.2% of transactions were unsuccessful between April 2020 to March 2021, against 24.2% in the same period of the previous financial year.

However, between December and March, there has been a steady decline in failure rates, down 5.3 percentage points by volume to 32.8%. Industry experts think that the return of covid-19 could lead to a few percentage point increase in bounce rates from April. Whatever improvement was being recently observed may be lost, because of the second wave of covid-19, said Parijat Garg, a digital lending expert. The first to get affected by will be payments from borrowers in the self-employed category as their incomes will be affected by these mini lockdowns, according to Garg.

“For the salaried class, there is no immediate risk, unless the restrictions extend till about June and beyond. The bounce rate, which declined to 32.8%, could inch up to 35-37% if business activity is repeatedly disrupted,” he said.

Trying to contain the unabated rise in coronavirus infections in Maharashtra, chief minister Uddhav Thackeray on 13 April announced further restrictions on movement till 1 May. States such as Madhya Pradesh, Haryana, Karnataka and Delhi have also imposed curbs on movement. Such lockdowns, however short-lived, will dampen economic recovery, experts said.

These repayment failures display the vulnerability of the retail loan segment for banks and non-bank financiers. Bankers stress that these failures are primarily from non-banking financial company customers, many of whom have relatively low credit scores and are more susceptible to cash flow disruptions. That said, individual loans are clearly the bastion of most banks and non-banks, with even those with large legacy infrastructure bad loans now focusing largely on retail. Bank loans to individual borrowers stood at 27.7 trillion as on 26 February, showed data from the Reserve Bank of India. Moreover, it is to be seen how banks with greater exposure to unsecured credit fare under the current circumstances.

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