Jul 2020 | Experian in the News |

Auto-debit transactions between different banks, which are used for recurring payments like loans, investments and bill payments, have seen a surge in the ‘bounce rate’, shows data from the National Payment Corporation of India.


The ‘bounce rate’ reflects the proportion of auto debits attempted but declined.


This higher bounce rate, according to bankers and industry experts BloombergQuint spoke to, suggests weakness in consumer finances which is leading to failed payments. But it may also reflect the haphazard manner in which lenders are operationalising the six-month moratorium permitted by the Reserve Bank of India.


What The Data Shows


The data in question is of transactions via the National Automated Clearing House, reported by the NPCI.


The NACH debit system works by first initiating a debit transaction against the customers’ account, termed as a ‘presentation’. Thereafter, if adequate funds are available in the account the money is debited, termed as a ‘final credit’. The proportion of final credit to total presentations gives us the ‘bounce rate’.


This bounce rate spiked to 45% in volume terms and 38% in value terms in June. In March, April and May, the bounce rate in volume terms was in the range of 26-33%. In value terms, it was 27-37%.


A finer look at the data shows that there was a dip in the number of presentations or initiations of NACH debit transactions in April and May. This was likely because of several borrowers opting for the first phase of the three-month loan moratorium permitted by the RBI.


In June, however, ‘presentations’ increased, suggesting fewer loans under moratorium, but ‘final credits’ didn’t rise commensurately, leading to a higher ‘bounce rate’. NPCI didn’t respond to emails and messages seeking more details on the data.


So What’s Going On?


Though the NPCI data on NACH debit transactions includes payments for insurance premiums and investments, at least 80% of these transactions are for loan repayments, according to several industry executives who spoke to BloombergQuint.


About 30% of all retail loan payments are routed via NACH, these executives estimated. Auto-debit transactions within a bank, from a customer’s savings or current account to their loan account, aren’t counted within NACH data.


“Most customers in the salaried segment would provide a NACH mandate to their lenders and it’s fairly common in the secured loan segments like auto-loans and home loans,” said Parijat Garg, a former executive with a credit bureau. “The use of NACH is less in self-employed and unsalaried segments or in the case of credit cards and other loan segments where the loan instalment is not the same every month.”


The data, Garg said, suggests that the borrowers don’t have adequate funds in the accounts linked for loan repayments.


According to Abhishek Agarwal, co-founder and chief executive officer of alternative credit scoring platform CreditVidya, the NACH data suggesting higher bounce rates is in line with their findings. For the mass-market segment of borrowers the bounce rates, via cheques or NACH debit, is between 55-60%, while for the affluent segment of borrowers the bounce rates is between 30-50%.


“While most self-employed borrowers have seen a fall in incomes, most people are saving more today compared to the pre-Covid period due to the uncertainty surrounding future income. We found that people are also moving money from their NACH linked accounts to another account,” Agarwal said.


Strain On Consumer


Finances The reason the increased ‘bounce rate’ on auto debit transactions is confounding is that the Indian banking regulator has permitted lenders to offer all borrowers a six-month moratorium till end-August.


Why then are stressed borrowers not using the moratorium instead of defaulting on payments?


One reason could be lenders tightening approval for loan moratoriums in the second round. According to a July 12 note by Emkay Global Financial, the moratorium rates for lenders on aggregate have fallen to around 20% in Phase 2 from 30% in Phase 1, mainly due to lower corporate moratorium and moderation in certain retail segments. Still, the rise in the ‘bounce rate’ data as per the NACH is indicative of systemic stress, the brokerage said, cautioning of increased defaults.


According to Aseem Dhru, managing director and chief executive officer, retail and small business lender SBFC Finance Pvt., all lenders seem to be reporting 2.5 to 3 times rise in cheque and NACH bounces.


As per the data, even if it includes payments for investments, if there is a rise in customers not having enough money in their accounts, it’s not a good sign. The cash flows in the customers’ bank accounts has dropped which is concerning. The data is reflecting that there is a large strain on cash flows for most customers and that is a sign that at some stage this will eventually lead to further slipages.


Haphazard Operationalising Of Moratorium


There may be one other factor at play in the increased ‘bounce rate’ across auto-debit transactions — the manner in which banks are managing the back-end while offering a moratorium on loan repayments.


Each bank has a different process and operationally they have tweaked their system differently, said the retail head of a state-run bank, while speaking on condition of anonymity. Therefore, there could be cases where the money is still debited, for a moratorium borrower, but the bank will automatically cancel or reverse the transaction, this person said. Where banks have marked customers, who have taken the moratorium, in their loan management system, the system would block any attempt to auto-debit, this person added.


“The NACH debits and other collection instruments are blocked or temporarily suspended for moratorium customers internally and they will be re-enabled once the moratorium ends or whenever the customer wants to opt-out of the moratorium,” said Babu KA, senior vice president and head of loan collection and recovery, Federal Bank.


According to Vivek Belgavi, partner and fintech leader at PwC India, in light of moratorium benefits extended to borrowers, banks are struggling to effect their NACH as equated monthly installments and interest payouts are changing rapidly. “The banks are looking at alternatives by keeping NACH on hold for some period and using other options like the Unified Payments Interface and National Electronic Funds Transfer,” he said.


No Credit Score Impact


While the bounce rate may have risen, customers won’t be unnecessarily penalised if there are wrongful instances of payment default, said Ashish Singhal, managing director, Experian Credit Information Company.


“Since these bounces could take place due to technical reasons or insufficient funds, credit bureaus do not factor NACH or cheque bounces as part of the credit score calculations,” Singhal said. “We mainly receive loan repayment data from lenders so the score would reflect only when the bank or lender reports a delay or default.”


Singhal, however, said that their data too was reflecting weakness across consumer credit segments. In the last few years there has been a rise in the 30-days past due rate, while the 90-days past due rate has not gone up, which reflects that more customers have missed one repayment but are ensuring that they catch up in the following months, he said.