Retail loan defaults fall in July as economy continues to recover

THE LARGE SLIPPAGES WERE PARTICULARLY IN SEGMENTS SUCH AS GOLD LOANS, MICROFINANCE, COMMERCIAL VEHICLE LOANS

MUMBAI: Retail loan repayments showed a marked improvement in July after a sharp spike in defaults during the preceding three months as millions of Indians skipped payments either because they lost income during the pandemic’s second wave or used up their savings to pay for Covid treatment.

While the default rates are still high, with 33.2% of autodebit transactions failing in July, mainly because of insufficient funds, it is still a significant improvement from the 36.5% failure rate in the previous month, data from the National Payments Corp. of India showed.

The figures are for transactions conducted through the National Automated Clearing House for inter-bank mandates and does not reflect intra-bank standing instructions. These are recurring payments where funds are drawn monthly from their bank accounts.

The improvement indicates that borrowers are gradually recovering from the pandemic’s toll on finances. The second wave and the ensuing lockdowns led to lost income for a vast section of non-salaried Indians, leaving them without the means to keep up with their debts.

“Given the unlocking that is happening, the default rate should see some improvement. However, it may take some more months for the bounce rate to return to pre-Covid levels,” said Anil Gupta, vice-president of rating company ICRA Ltd.

In value terms, 27.4% of transactions were unsuccessful in July against 30.3% in the previous month.

According to Macquarie Research, the current bounce rates are similar to those seen in January-March period, just before the second wave hit India.

Still, the bounce rates by value are a whopping 700-800 basis points higher than the pre-Covid level, highlighting the pain among borrowers.

“Many banks have said they have already recovered close to 30-40% of the slippages seen in Q1FY22 in July. The large slippages were particularly in segments such as gold loans, microfinance, commercial vehicle loans where collections were impacted due to lockdowns as well as the health of employees or collection workforce,” Macquarie Research said in a recent note.

There was a steady decline in failure rates between December and March, dropping 5.3 percentage points by volume to 32.8%.

However, the second wave turned out to be deadlier than the first onslaught last year. The impact was evident in banks reporting lower collection numbers for April and turning cautious.