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NPAs have been a nightmare to many lenders in recent years, and the Corona situation only made it worse. But the latest report on ‘Debit Bounce Rates’ released by the NPCI shows some promise.
As per latest reports, the bounce rate for February 2022 was at 22.4% of transactions by value and 29.2% by volume. In terms of value, bounce rates for February 2022 are just around 100bps higher than the average levels of around 21.5% witnessed between February 2018 and February 2020. In terms of quantity, terms bounce charges for February on a median were around 25.8% prevalent in the pre-Covid phase of June 2019 to February 2020.
Suresh Ganapathy, research analyst at Macquarie says, “This means that asset high quality is probably going to enhance, and we may see an extra discount in retail NPLs in 4QFY22. The latest geopolitical tensions and the corresponding effect on oil costs, nevertheless, may trigger some concern within the retail phase, particularly in rural and business automobile sections as excessive gas costs are handed on to prospects.”
While talking on the same issue, Mr. Anil Gupta, Vice President and Sector Head - Financial Sector Ratings at ICRA said, “It appears that since the lockdowns were not very severe, economic activity, income and collection efficiency did not get impacted in January. The bounce rate, in fact, continued to improve and reduce further.”
He did, however, point out that the first 10 days of the month normally see a sizable percentage of EMI presentation and collection. He further said, “In January, the first 10 days saw the third wave picking up but not reaching its peak. Hence, a better picture of the impact of the pandemic on repayments may be available with data from February. But hopefully, the situation will continue to improve.”
Bounce rates have consistently declined from a peak of 45.4% 2020 to 29.9% 2021. The bounce rate increased somewhat in the second wave of the pandemic in the first quarter of the fiscal year, peaking at 36.5% 2021 and then progressively declining.
According to the data, borrowers' income remained immune to the pandemic's third wave. Banks and NBFCs are convinced that the third wave of the epidemic will not have an impact on borrowers' repayment capacity because it did not result in substantial lockdowns that damaged people's lives and livelihoods.
According to Macquarie, bounces have an impact not on the destination bank (where the consumer has a bank account), but on the sponsor bank that sends the debit request. Ganapathy contends that sponsor bank bounce rates have a greater impact on asset quality, but that sponsor banks may also be acting as collection agents for other FIs (eg. NBFCs). As a result, based on our understanding, we cannot draw straightforward conclusions about asset quality.
Although data for the banks with the greatest bounce rates is available, these figures may not accurately reflect their loan performance. According to bankers, despite high bounce rates, only a portion of the amount is converted to delinquency and an even smaller number into non-performing assets.
Many experts seem to deduce that collection efficiencies in January were unaffected by the pandemic. For example, Mahindra Finance reported that their collection efficiency was 96% in January 2022, up from 94% in January 2021, which was in line with expectations.
Significantly, the amount and quantity of auto debit mandates handled has gradually increased from 8.39 crore mandates processed in January 2021, suggesting consistent consumer approval.
The number of defaulting borrowers has fallen for the first time in more than a decade. The recent dip in India’s bad loan ratio is a clear indicator that macroeconomic conditions are improving.
As Indian banks had started taking a more rigorous approach to loan curbs, the number of accounts that were classified as non-performing improved steadily; Commercial banks' gross non-performing assets (gross NPAs) dropped from 7.5% in March 2021 to 6.9% at the end of September 2021. Concurrently, their net NPA ratio fell by ten basis points to 2.3% in September 2021, down from 2.4% in March 2021.
A higher NPA ratio is bad for the economy because it implies that banks are losing money by lending to bad borrowers. It also indicates that the economy’s growth is slowing, and that consumers are struggling to repay loans.
While the number of defaulting borrowers has fallen for the first time in more than a decade, it is still too early to proclaim a full-blown recovery in the Indian economy. The fall was a timely boost to the banking sector at a time when the Indian economy was showing clear signs of recovery. The declining delinquency levels would help banks increase their provision for bad loans to a level that is consistent with their loan to income ratio.