Banking industry experts aware of the happening confirmed on Monday that shadow banks including fintech lenders were the prime source of the rise in auto-debit failures that continued through October. These are automatic payments happening on a recurring basis where loan instalments are withdrawn every month from a bank account.
Largest failures were reported from low-rated borrowers of non-banking financial companies (NBFC), a few commercial vehicle borrowers and even some people who had taken loans from fintech lenders due to the hit of COVID-19 and a lot of these borrowers were stressed out even before the pandemic struck.
Latest data on auto-debit suggest that transactions on the National Automated Clearing House (NACH) platform, as much as 40.1 percent of auto-debit transactions by amounts in October had largely failed due to lack of sufficient funds, hence worsening from a bounce rate of February’s 31.5 percent.
“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,” a senior official at State Bank of India (SBI) said in a statement.
“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 added. The bank officials emphasised that the current defaults are from borrowers who are slightly lower in credit quality and is mostly from NBFC customers.
Chief executive of Shriram Transport Finance Ltd, Umesh Revankar, said that the passenger transportation segment is still not fully functional and this has led to non-repayment by some borrowers and the NBFC expects least 2.5 percent 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 had stated on 30 October.
Not only has the pandemic disrupted the cash-flow of the consumers but has also forced them to borrow fresh loans from fintech lenders at a higher interest rate. Some companies charge more than 30 percent interest for personal loans and the consumers of such loans are primarily those who need immediate cash.
“It is a fact that most of the stress is coming from non-banks, including fintech. The segments such as unsecured loans and, to some extent, commercial vehicles, are under higher stress,” Prakash Agarwal, director and head-financial institutions at India Ratings and Research said. “Borrower profiles of non-banks are weaker and, hence, the pandemic impacted them more,” he added.
Fintech lenders are of the notion that with the required amount of counselling about the negative impact of non-payment and in some extreme cases offering a restructuring of loans will help the lenders improve their rates of collection.
MoneyTap’s co-founder and executive committee member at Digital Lenders’ Association of India (DLAI), Anuj Kacker, stated that October is the first-month receiving full repayments 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,” Kacker said.
