EMI bounces rose in June despite easing of COVID curbs, shows NPCI data

The Reserve Bank of India has flagged the risks that the second COVID wave poses to retail and micro, small and medium enterprises accounts.

The bounce rate, or failure rate, of auto-debit transactions rose in June from the previous month, despite the easing of lockdowns across states. Many of these transactions are debit requests for EMIs and their failure indicates an increase in stress among retail borrowers.

As per data released by the National Payments Corporation of India, of the 87.87 million debit requests made in June over the National Automated Clearing House (NACH) platform, 32.08 million, or 36.51 percent, bounced. The comparable bounce rate for May was 35.91 percent and in April, it was even lower at 34.05 percent. The second wave of the COVID pandemic was at its peak during April and May.

In terms of value, the bounce rate on auto-debit requests stood at 30.27 percent in June, marginally better than 30.74 percent in May but still much higher than the 27.99 percent level seen in April.

Data from the NACH platform does not capture intra-bank transactions. This means that borrowers who have loans from the same bank where they have their EMI debit account are not accounted for in the data. Many of the transactions on NACH are for EMI payments to smaller non-banking financial companies (NBFCs) and fintech lenders.

The Reserve Bank of India (RBI) has flagged the risks that the second COVID wave poses to retail and micro, small and medium enterprises (MSME) accounts. In the July 2021 edition of its Financial Stability Report released last week, the central bank said that consumer credit deteriorated after the loan moratorium programme came to an end in September 2020.

“Consumer credit portfolios of non-PSBs (public sector banks) are seeing incipient signs of stress,” the RBI said. The report showed that delinquency rates in the consumer credit portfolios of private banks rose to 2.4 percent in January 2021 from 1.2 percent in January 2020, and that for NBFCs rose to 6.7 percent from 5.3 percent over the same period.

Analysts have taken the view that once the impact of regulatory measures wears off, the stress on lenders’ books would start to show up. In a report dated July 7, Fitch Ratings said that the regulatory moratorium, COVID-19 specific restructuring and state guaranteed refinance for MSMEs, totalling over 10 percent of system loans, had a significant role in suppressing stress. “Fitch expects impaired loans to peak after FY23 since stress is likely to manifest from this pool over a fairly protracted timeframe,” the rating agency said in the report.

Others have pointed out that non-bank lenders are at even greater risk. NBFCs and housing finance companies engaged in retail businesses faced significant challenges in collections during the first two months, said Kotak Institutional Equities (KIE) in a report dated 6 July. “While there was a catch up in June, overall collections for the quarter were weak,” the report said.

The absence of a moratorium, unlike in the past year, will likely lead to higher restructuring, according to the broking firm. “Credit cost remains challenging to forecast with incremental focus on monthly collections and likely catch up in 2QFY21, when complete impact of the recent challenges will be reflected,” analysts at KIE said.