Shadow banks including fintech lenders were the prime source of the spike in auto-debit failures that continued through October, three industry executives aware of the development said. These are recurring automatic payments where loan instalments are drawn every month from a bank account.

Most failures were from low-rated borrowers of non-banking financial companies (NBFC), some commercial vehicle borrowers and even people who had taken loans from fintech lenders, as the pandemic shrank incomes and livelihoods.

A lot of these borrowers were stressed even before the pandemic struck.

According to the latest data on auto-debit transactions on the National Automated Clearing House (NACH) platform, as much as 40.1% of auto-debit transactions by volume in October had failed, largely due to insufficient funds, worsening from a bounce rate of 31.5% in February.

“At least, large banks have a majority of their own customers as borrowers and the equated monthly instalment (EMI) debit is done through internal standing instructions. The NACH data does not capture these intra-bank mandates,” said a senior official at State Bank of India (SBI), India’s largest bank.

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Sarvesh Kumar Sharma/Mint

The bank official said that the current defaults are from borrowers slightly lower in credit quality and mostly from NBFC customers.

“There is always a section of self-employed borrowers who do not pay on time but pay a couple of due instalments in one go. Such defaults also add to the number on NACH,” the official said.

Umesh Revankar, chief executive of Shriram Transport Finance Ltd, said the passenger transportation segment is still not fully operational.

This has led to non-repayment by some customers and the NBFC expects 2.5% of its loan book to be recast.

“Most of these people who are not able to pay, they are in that segment, which I briefly mentioned—aggregators, school buses and staff transportation. That’s the major chunk of people who are not able to pay because their business is not operational yet,” Revankar told analysts on 30 October.

Not only has the pandemic disrupted cash flows of borrowers, it has also forced scores of people to borrow afresh from fintech lenders at a high interest rate.

Some of these companies charge more than 30% interest for personal loans and their borrowers are primarily those who need cash to meet immediate requirements.

“It is a fact that most of the stress is coming from non-banks, including fintechs. The segments such as unsecured loans and, to some extent, commercial vehicles, are under higher stress,” said Prakash Agarwal, director and head-financial institutions at India Ratings and Research.

Agarwal added that borrower profiles of non-banks are weaker and, hence, the pandemic impacted them more.

Fintech lenders believe that with the right amount of counselling about the negative impact of non-payment and in some genuine cases offering a restructuring of loans will help lenders improve their collection rates.

Anuj Kacker, co-founder, MoneyTap and executive committee member at Digital Lenders’ Association of India (DLAI), said October is the first full month of repayment after six months of moratorium announced by the Reserve Bank of India.

“Most lenders, fintech and traditional, were expecting a higher bounce rate and, hence, this has not been a surprise. Based on several conversations with customers, the reasons vary from being unaware about the moratorium being lifted to loss of job/income,” said Kacker.

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