Banks’ exposure to Adani group not large enough to affect credit quality: rating agencies

Global rating agencies Fitch and Moody’s on Tuesday said banks’ exposure to the Adani Group was not large enough to affect their credit quality, and bank ratings are driven by expectations that they would receive ‘extraordinary’ sovereign support, if needed.

“Fitch Ratings believes that Indian banks’ exposure to the Adani group is insufficient in itself to present a substantial risk to the banks’ standalone credit profiles,” the rating agency said in a note.

Moody’s stated that although the exposures to Adani group are larger for public sector banks than for private sector banks, they are smaller than 1% of total loans for most banks.

“Risks for banks can increase if Adani becomes more reliant on bank loans,” Moody’s said.

However, the group’s access to funding from international markets can be curtailed because of heightened risk perception.

“Yet the overall quality of Indian banks’ corporate loans will be stable,” Moody’s said. “Corporates in general have deleveraged in the past few years. This is reflected in modest growth in their corporate loan books. Further, banks’ underwriting has been conservative.” Fitch said ratings of banks remain driven by expectations that the banks would receive extraordinary sovereign support, if needed.

U.S.-based activist short-seller Hindenburg Research in a report dated January 24 made a litany of allegations, including fraudulent transactions and share price manipulation at the Gautam Adani-led group.

The Adani group has dismissed the charges as ’lies’, saying it complies with all laws and disclosure requirements. The Opposition, however, has been calling it a ‘big fraud’.

Stocks of the Adani group companies have taken a beating, losing billions of dollars in market value. The Indian stock markets too have tumbled over concerns.

“We currently believe the economic and sovereign implications of the Adani controversy remain limited. However, there is a tail risk that fallout from the controversy could broaden and influence India’s sovereign rating, with knock-on effects for bank IDRs (Issuer Default Rating),” Fitch said.

Amid concerns over banks and financial institutions’ exposure to the Adani Group, several lenders have come forward and disclosed their investments in the crisis-ridden group.

State Bank of India, the country’s largest lender, has total exposure of ₹27,000 crore to the group. Punjab National Bank’s (PNB) exposure was at ₹7,000 crore. Private sector lender Axis Bank’s exposure stands at 0.94% of its net advances.

In a note of caution, Fitch also said that the allegations could hurt India’s medium-term economic growth as the negative spillover of the crisis at the metal-to-mining conglomerate could make borrowings costlier for broader Indian corporates, though such risks are low.

Fitch said 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 country’s medium-term economic growth could also be hurt if the group’s troubles have substantial negative spill-overs to the broader corporate sector or significantly raise the cost of capital for Indian firms, dampening investment.

“Nonetheless, we still view the underpinning of India’s robust growth outlook as sound and that such risks are low,” Fitch said.