EMI bounce rates fall further in February, but concerns persist

The share of failed auto-debit requests on the National Automated Clearing House (NACH) platform eased to 29.21% in volume terms in February, down 43 bps from January. In value terms, the bounce rate stood at 22.44%, down 99 bps from January. While these levels mark the lowest failure rates on EMI requests since the beginning of the pandemic in March 2020, sector experts say some pockets of retail loans are still showing high delinquency rates.

Analysts watching the sector attribute the improvement in EMI repayments to the impact of loan restructuring and the emergency credit line guarantee scheme (ECLGS) for small businesses. Some of them, however, believe that the improving bounce rates do not fully reflect the level of stress in small borrower accounts.

According to data released by the National Payments Corporation of India (NPCI), of 94.82 million debit requests made in February on the NACH platform, 27.69 million bounced. In terms of value, of the requests for Rs 90,056 crore, declines were to the tune of Rs 20,213 crore.

In a report dated March 8, analysts at Emkay Global Financial Services said EMI bounce rates are trending around pre-Covid levels due to an improving business and job environment and restructuring of loans. “Underlying asset quality of restructured loans will be visible once the moratorium expires over the next 12-24 months, but bankers expect a lower relapse rate in the current cycle (10-20%), excluding MFI (micro loans),” the report said.

Fresh delinquencies are trending down meaningfully, Emkay said, while collection efficiency in early to mid buckets, where loans have been overdue for fewer number of days, is trending even better than in Q3FY22. On the other hand, recoveries in accounts that have been overdue for longer, especially in unsecured and two-wheeler loans, may demand more robust field collection efforts or even settlements and write-offs.

Data from the NACH platform do not include intra-bank transactions and hence do not represent all debit requests made in the financial system. EMI payments to smaller NBFCs and fintechs account for a chunky share of requests made through the NACH platform.

India Ratings and Research said in a recent report that segments such as personal loans, business loans, school bus, taxi segment and heavy commercial vehicles are still witnessing lower collection efficiencies and higher bounce rates. “These have been restructured at a higher proportion and so the actual pain in these segments does not get reflected in the bounce rate data. Ind-Ra believes that credit cost would be elevated for FY22 and slippages from the restructured book can put pressure on the headline asset quality numbers,” the agency said.

Typically, the restructured book is provided for in the range of 10-20%, according to India Ratings, but slippages from this book will necessitate 15-30% of additional provisioning. As a result, the NBFC space will see moderate profitability for FY22 amid higher credit costs and operating expenses.

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