Failed auto-debit requests ease to a 38-month low in May, shows NACH data

'Improving bounce-rate trajectory suggests slippages, credit cost will descend in FY23'

The unsuccessful auto-debit requests or bounce rates eased to a 38-month low in value terms in May, despite rising interest-rate scenario resulting in repricing of loans and inflationary pressure impacting household income.

According to the National Automated Clearing House (NACH) data, the bounce rate in May eased to 22 per cent in value terms, down 50 basis points (bps) from April, and is the lowest since April 2019.

The pre-Covid average bounce rate in volume terms was 24–25 per cent. In volume terms, the bounce rate fell to a 33-month low at 29 per cent, down 87 bps from April. The pre-Covid average bounce rate in volume terms was 30–31 per cent.

“Improving bounce-rate trajectory, after a surprising rise in March, suggests that slippages and credit cost will descend in 2022-23. Also, the fourth quarter of 2021-22 (FY22) earnings reflected that asset quality woes have waned for financiers and the focus is shifting back to growth,” said ICICI Securities in a report.

“Given inflationary pressures, rising input costs and surprise hikes in benchmark rates, we will watch out for the extent of decline in asset quality,” the report added.

The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) has raised the benchmark policy rate by 90 bps since May to tame headline inflation, which has been over the mandate of 4 per cent (plus/minus 2 per cent) for a very long time now. This has resulted in external benchmark-linked loans rising by the same proportion.

As of December 2021, a little over 39 per cent of bank loans, including 58.2 per cent of home loans, were linked to the external benchmark, reveals the RBI data. Lenders have also raised their marginal cost of funds-based lending rate since the repo rate hike by the MPC on May 4.
 

“The bounce rate continues to improve, although the inflationary trends and frequent interest-rate hikes may have an impact in the months to come. The impact of the rate hikes that have taken place so far has not reflected on the bounce-rate numbers and will start reflecting from June onwards. The bounce-rate volume continues to be significantly higher than the bounce-rate value, indicating that marginal borrowers continue to face repayment pressure,” said Anil Gupta, vice-president-financial sector ratings, ICRA.

Bounce rate, which was otherwise on a downward trajectory, inched up suddenly in March, but eased again in April. In March, bounce rates in value and volume terms increased 40 bps each, from the previous month.

Bounce rates reached their peak between June and November 2020, highlighting stress in the system due to the Covid-19 pandemic. They started coming down from December 2020 onwards as the first wave of the pandemic ebbed, resulting in higher regularity in equated monthly instalments, utility and insurance premium payments by consumers.

However, the trend again reversed in April 2021, as rates inched up due the second wave of the pandemic. After rising for a few months due to the second wave, bounce rates started falling again July 2021 onwards and went into a downward spiral until they reared their head in March this year. In FY22, the bounce rate by value was 25.88 per cent and in volume terms, 34.75 per cent.

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

NACH is a bulk payment system operated by the National Payments Corporation of India that facilitates one-to-many credit transfers. These are dividend payment, interest, salary, and pension. They also include collection of payments pertaining to electricity, gas, telephone, water, periodic instalments towards loans, investments in mutual funds, and insurance premium. These are applicable for interbank mandates or between a bank and a non-banking financial company or a financial technology lender.