Bank credit profiles not at much risk from Adani exposure, says Fitch

State-owned lenders could see pressure to refinance group's debt if global market shun it

Indian banks’ exposure to the Adani Group is not that large to present substantial risk to their standalone credit profiles, said rating agency Fitch on Tuesday.

“We believe loans to all Adani group entities generally account for 0.8%-1.2% of total lending for Fitch-rated Indian banks, equivalent to 7%-13% of total equity. Even in a distress scenario, it is unlikely that all of this exposure would be written down, as much of it is tied to performing projects,” it said.

The issuer default ratings of all domestic banks continue to be driven by expectations that the lenders would receive extraordinary support from the sovereign if the need arose, the rating agency said.

Following allegations of stock manipulation and accounting fraud by US-based Hindenburg Research on January 24, the Adani group saw its stocks plunge, losing Rs 9.1 trillion in market capitalisation till the end of last week.

Banks have an exposure of Rs 80,000 crore to the conglomerate, with State Bank of India leading the pack with Rs 27,000 crore. Last week, the RBI asked banks to give information about their outstanding exposure to the group and the sanctioned amounts.

According to Fitch, loans involving projects under construction and those at the company level could have greater vulnerability. However, even if exposures were entirely provisioned for it would not impact Indian banks’ viability ratings as lenders have enough headroom at their current rating levels, the rating agency said.

Other analysts too were of the view that the banking sector’s exposure to the Adani Group was not a cause for concern.

“Now the key message from all the disclosures that have come from PSU banks as well as private sector banks is that exposure to the large conglomerate group is manageable and small,” said Suresh Ganapathy, head, financials research at Macquarie Capital.

“All around very strong numbers by the PSU banks SBI, BOB (Bank of Baroda). Record low credit costs, high margins, high ROA, very strong loan growth. Guess it can’t get better than this,” he said.

Refinancing pressure

Fitch warned, however, that in the event of foreign banks scaling back their exposure or weak global investment appetite for the Adani Group’s debt, state-owned banks could face pressure to provide refinancing for the domestic conglomerate.

“This could affect our assessment of the risk appetite of such banks, particularly if not matched with commensurate building of capital buffers. However, such a scenario would underpin the quasi-policy role of state-owned banks and reinforce our sovereign support expectations,” Fitch said.

The rating agency noted that the effects of such refinancing pressures on state-owned banks could be amplified if the Adani episode augments financing challenges for other Indian corporate entities, which would then increase reliance on local bank borrowings.

Fitch said that there were “tail risks” that the aftermath of the Adani crisis could influence India’s sovereign rating.

“The Adani group plays an important role in India’s infrastructure construction sector. Infrastructure development may slow, curbing India’s sustainable economic growth rate, if its ability to contribute to the government’s infrastructure rollout plans is impaired, though we believe the impact on growth would be likely to be small,” the agency said.

Moreover, if the Adani episode has significant negative spill-overs to the larger corporate sector or leads to a sharp rise in cost of capital for companies, India’s medium-term growth could be hurt, Fitch said.

The rating agency nonetheless still views the underlying foundations of India’s firm growth outlook as sound, saying that risks of large negative spill-overs were low.