Indian banks face 'limited risk' from Adani Group turmoil, Fitch says

Billions have been wiped off the market value of the Indian conglomerate following the US short-seller's accusations of fraud

A State Bank of India branch in Mumbai. Loans to all Adani Group entities generally account for roughly 0.8 per cent to 1.2 per cent of total lending for Fitch-rated Indian banks. Bloomberg

Indian banks' exposure to the embattled conglomerate Adani Group is “insufficient in itself” to present substantial risk to lenders, according to Fitch Ratings.

Indian banks’ issuer default ratings “remain driven by expectations that the banks would receive extraordinary sovereign support, if needed”, the rating agency said on Tuesday.

The Adani Group has been in turmoil since US-based short-seller Hindenburg Research accused the conglomerate of “brazen” market manipulation, unsustainable debt and use of tax havens in a report last month.

The group has repeatedly denied the allegations.

Since the report's release, Adani shares have been in free fall, with the group's cumulative market value slumping by more than $110 billion.

However, Adani group shares stemmed the decline and surged on Tuesday on news that its founder, Indian billionaire Gautam Adani, and his family prepaid $1.11 billion worth of debt.

Shares of the group's flagship company Adani Enterprises were up more than 15 per cent on the Bombay Stock Exchange at the close of trading on Tuesday.

The controversy over the Hindenburg report “has no immediate impact” on the ratings of Fitch-rated Adani entities and their securities, Fitch had said on February 3.

“Even under a hypothetical scenario where the wider Adani group enters distress, exposure for Indian banks should, in itself, be manageable without adverse consequences on the banks' viability ratings,” the rating agency said.

Loans to all Adani group entities generally account for roughly 0.8 per cent to 1.2 per cent of total lending for Fitch-rated Indian banks, equivalent to 7 per cent to 13 per cent of total equity, it said.

“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. Loans involving projects still under construction and those at the company level could be more vulnerable,” Fitch said.

The country’s biggest lender, State Bank of India, said last week that its exposure to Adani Group stood at about 270 billion rupees ($3.3 billion), or 0.9 per cent of its loan book.

Dinesh Khara, the bank's chairman, told reporters that there were no concerns so far regarding its exposure to the conglomerate.

The Reserve Bank of India on Friday also stressed that the country’s banking system was “resilient” as it sought to address concerns about the exposure of Indian lenders to the Adani Group.

“As the regulator and supervisor, the RBI maintains a constant vigil on the banking sector and on individual banks with a view to maintain financial stability … the banking sector remains resilient and stable,” RBI said in a statement, without directly naming the business conglomerate.

“Various parameters relating to capital adequacy, asset quality, liquidity, provision coverage and profitability are healthy. Banks are also in compliance with the Large Exposure Framework guidelines issued by the RBI,” it said.

India’s corporate sector has generally deleveraged in recent years, reducing its exposure to refinancing risk, Fitch said in the report.

“We currently believe the economic and sovereign implications of the Adani controversy remain limited.”

However, the rating agency warned that state banks could face pressure to provide refinancing for Adani entities if foreign banks scale back their exposure or investor appetite for the group’s debt weakens in global markets.

“This could affect our assessment of the risk appetite of such banks, particularly if not matched with commensurate building of capital buffers,” it said.

The Adani Group, which has interests in sectors from ports to renewable energy, also 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 roll-out plans is impaired, though we believe the impact on growth would likely be small,” Fitch said.

“The country’s medium-term economic growth could also be hurt if the group’s troubles have substantial negative spillovers 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,” it added.