Another way in which lenders may have shored up collection ratios is by treating some instalments paid during the moratorium period as advance instalments, said a senior analyst tracking the financial sector.Another way in which lenders may have shored up collection ratios is by treating some instalments paid during the moratorium period as advance instalments, said a senior analyst tracking the financial sector.

The share of unsuccessful auto-debit requests remained high at 40% in October even as banks and non-bank lenders said their collections had started to bounce back to close to pre-Covid levels. Data released by the National Payments Corporation of India (NPCI) from its National Automated Clearing House (NACH) platform also showed that of the 84.83 million debit requests for Rs 79,022 crore worth of payments made in October, 34 million requests for Rs 25,498 crore were declined. In other words, the bounce rate in value terms stood at 32.27%, worse than 31.72% a month ago.

After their September quarter results, most major banks and non-banking financial companies (NBFCs) have said that their collection efficiencies have returned to between 85-97%. The bounce rates on auto-debit transactions do not bear this out and some analysts, too, have been sceptical about the lenders’ commentary.

Some believe the improvement in collections may be a short-lived phenomenon. One of the explanations could be that borrowers who had accumulated some liquidity during the moratorium period made repayments after it ended. Obviously, any such liquidity is likely to run out in a matter of months, unless cash flows improve.

Another way in which lenders may have shored up collection ratios is by treating some instalments paid during the moratorium period as advance instalments, said a senior analyst tracking the financial sector. “So if someone has paid two out of the six instalments during the moratorium, the lender might have adjusted them as advance payments for September and October. That could be another reason behind these improved collection numbers,” he explained. Both these methods can offer only temporary help to collection ratios.

Most lenders have not shared any actual figures on the consistency of repayments through the moratorium period. An exception is DCB Bank, which offered a segment-wise breakup of collection efficiencies after its Q2 results. For instance, it specified that in the commercial vehicle segment, customers who have not paid any instalment from April 1, 2020, to September 30, 2020, was 19.2%. This has further reduced to 10.8% as on October 30. In the microfinance business, 7% of customers had not paid any instalment between April 1 and October 26, 2020. The unavailability of such granular data for other institutions has made it harder to gauge the actual stress in the financial sector.

Banks continue to insist, though, that the pick-up in collections is going to be sustainable. State Bank of India, which last week said that its collection efficiency stood at 97.5%, expects this level to hold. Chairman Dinesh Kumar Khara said that the economy is picking up and so should collections. “I think perhaps it is sustainable for the simple reason that during the Covid period they (borrowers) have accumulated liquidity, but once revival of the economy happens, I’m sure there would be much more cash flows and it will all go to the individuals, which should actually enable them to take care of their repayment obligations.”

Analysts said that bounce rates of anything above 25% should continue to be a cause for concern as it would mean retail delinquencies remain well above pre-Covid levels. At the same time, some believe that jobs have started to come back and that should support retail repayments. A recent report by Goldman Sachs posted that an increase in Employee Provident Fund Organisation (EPFO) subscribers bodes well for the employment landscape and, by extension, for lenders’ collections.

The same report also stressed on the importance of collections being sustainable. “…we believe that a decisive and sustained improvement in collection efficiency is needed for growth to pick up, although at the same time it does lend confidence that credit quality will improve in the next couple of quarters.”

Bank stocks have run up significantly in the last few sessions of trade, predominantly on the expectation that collections have returned and there is little stress to worry about. Data on EMI bounces and limited disclosures from banks, though, tell a different story.

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