Loan Defaults Take an Intense Turn Despite RBI’s Efforts

The Reserve Bank of India (RBI) had exceeded the loan moratorium for a period of 6 months, hoping to result in a deliberating impact on the credit creation in the economy.

 RBI’s moratorium extension  and increase in loan defaults

RBI

Despite the loan moratorium having ended in August, there has been an inclination in the loan default in September which is higher than pre-pandemic rates. Borrowers are defaulting on their payment due to the current economic distress.

The data from the NACH showed that 41% of auto-debit transactions in volume have fallen in September, whereas it was only 31% in February.

National Automated Clearing House (NACH) was introduced by the National Payment Corporation of India (NPCI). It is a web-based platform for facilitating inter-bank high volume transaction for Banks and Financial Institutions.

Banks were expecting repayment of the loan after the moratorium ended in August, but the default rate is still high. In September, 32% of auto-debit transactions failed, same as August but higher than the 25% in February. These are recurring payments where the borrower agreed for an auto-debit mandate which means that the banks draw the loan instalments from the bank account.

Many borrowers have misinterpreted the Supreme Court’s recent decision on maintaining the status quo in downgrading loans as an extension of the moratorium. On September 3, the SC ordered an interim stay on classifying bad loans if not declared by August 31.

“This is a tad disconnected from our feedback from banks and non-banking financial companies (NBFCs) and may be partly due to stalemate around the Supreme Court verdict. Lenders may need to pursue recoveries; clarity in Q2 results will be key,” said a note by Jefferies on October 7.

After the moratorium, lenders are being divided on repayment delinquencies.

There is a mixed opinion on the current situation; some believe that there is an increase in the number of defaulters while others believe that things are going back to pre-COVID normalcy.

An analyst, at Emkay in a note, mentioned that there is a sharp revival in collection efficiency in September as indicated by the management of non-bank lenders.

Read: RBI to SC: ‘Not Possible to Extend Loan Moratorium Period, May Vitiate Overall Credit Discipline.’

 

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