Market forecast: Private sector banks may face the maximum risk of bad loans.

While the industry and policymakers evaluate the damage caused to the banking system by the Coronavirus attack, a ball-park possible based on the past forecast reveals that, in the worst-case scenario of macro-economic recession, bad loans may grow to 120 basis points with banks in the private sector experiencing high risk.

A stress test performed by the regulator previous to the outbreak of the epidemic found that total bad loans could increase to 10.5% of total loans in September 2020 from 9.3% in September last in the worst-case situation of ‘extreme stress’. In the case of ‘reasonable stress,’ it might grow to 10.2%, suggests prediction from the Financial Stability Report published in December.

“Banks ought to oversee retail housing loans, where EMIs need to be reworked,” said Madan Sabnavis, CARE Ratings chief economist. Small to medium-sized enterprises, airlines, hotels, tour operators, restaurants and retail outlets will be more impacted as demand hits zero. Auto consumer durables are seeing a revolt as demand declines. Construction and immovable properties would often follow a detrimental leap.

During periods of extreme stress, the prediction is that economic growth in fiscal 2020 slips to 2.9% and in fiscal 2021 to 3%. To be sure, the outcomes of stress testing might give a totally different image if performed with the near lockdown of companies due to the Coronavirus.

Under the severe stress scenario, the Financial Stability Report said public sector banking group’s gross NPA may rise from 12.7% to 13.5%, and private lenders may rise to 5.4% from 3.9%.

As things stand, the lock-down is being planned for the next 10 days and would certainly throw the economy out of gear. That has sparked questions regarding job losses and cuts in pay. It can dent in loan growth and contribute to higher default for the banking sector. But make no mistake; economists said the Covid-19 has already begun to make its effect known. Reaction from the central bank to the developments can hold the key.

“Inflation can spike as shortages in supply may occur. It would be fascinating to see how RBI changes the trade-off between growth and inflation,” said Partha Ray, Professor of Economics at the IIMC.

Standard and poor’s sliced India’s expected FY20 growth to 5.2% from 5.7%. Fitch Ratings said India might raise at 5% this fiscal. India’s GDP growth fell to 4.7% from the updated second-quarter forecast of 5.1% for the third quarter until December 2019.

The lenders across the spectrum have demanded that the regulator tide over the evolving situation for smoother NPA and provisioning laws, and probable lack in credit demand.

“Regulatory forbearance might not be a wise option because the experience of 2008 shows the other side of it. Yet we must keep in mind that the NPA level in 2008 was far below what it is now. If at all, RBI offers forbearance, it must be clearly understood with a sunset clause,” said Ray of the IIMC.