Second Covid wave: direct debit payment bounce rate increases again in April

The second wave of the pandemic and localized lockdowns resurrected the issue of failed Direct Debit transactions in April.

According to data from the National Automated Clearing House (NACH), in April, 34.05% of automatic debit transactions by volume failed, compared to 32.76% in March – the lowest after February 2020.

In absolute terms, in April, of the 85.4 million direct debit transactions initiated, 56.3 million were successful, while 29.08 million failed. Since December, the share of unsuccessful direct debit requests has steadily declined, indicating greater regularity in monthly equivalent installments (EMI), utilities and insurance premium payments.

Unsuccessful direct debit requests through the NACH platform are generally referred to as bounce rates. The NACH platform is widely used to collect loan payments, mutual fund investments, and insurance premiums.

These are applicable for interbank mandates or between a bank and a non-bank financial company or a fintech lender.

Although the April figure is not alarming, industry experts say it could rise amid increasing lockdowns/restrictions imposed by many states.

“The bounce rate has increased because of the second wave and at first glance May could see a further increase in bounce rates, given the current situation. But the positive thing is that the bounce rates are not as high as they were in the first months of the first wave, although the current wave is much stronger,” said Anil Gupta, head of of the sector (financial sector ratings) to ICRA.

According to experts, NBFCs and fintech lenders have increased their lending to individuals and this may have been one of the reasons for the high bounce rate as the customer profile of NBFCs is lower than that of banks. So even before the pandemic hit, bounce rates were increasing.

The drop in direct debit transactions had peaked in June last year, when the failure rate was over 45%.

“While some parts of the country were in lockdown in April, in May the situation has changed and it looks like most of the country is in lockdown. As a result, bounce rates are expected to increase,” said Parijat Garg, loan consultant digital.

Satyam Kumar, CEO and Co-Founder of LoanTap, said, “We saw a difference of only 1% in the bounce rate…no significant impact on the bounce rate was observed.

Despite the fact that the bounce rate has gradually declined since the peak seen in the early months of the pandemic, it remains above pre-Covid levels. In January and February 2020, the bounce rate was around 31%. In FY21, unsuccessful direct debit requests represented 38.91% of total direct debit requests, while in FY20 it was 30.3% and in in fiscal year 19, by 23.3%.

There are many reasons why such requests are denied, but the most common is that customers do not have sufficient balance in their accounts. The high rebound rate seen last year coincided with the peak months of the pandemic, which ravaged the economy, putting millions out of work. Additionally, there was a moratorium on loan repayments for six months which ended on August 31, 2020.

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