Indian Banks Face Limited Risk As Exposure To Adani Group Is 'Insufficient': Fitch Ratings

Fitch Ratings said Indian banks’ exposure to the Adani group won't pose a substantial risk to the banks' standalone credit profiles.

Adani Group has faced stock rout after an explosive report by US short seller Hindenburg Research

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Credit rating agency Fitch Ratings believes that Indian banks’ exposure to the Adani group was insufficient in itself to present a substantial risk to their standalone credit profiles. On February 3, Fitch had stated that the controversy over US short seller Hindenburg Research's report had no immediate impact on the ratings of Fitch-rated Adani entities and their securities. 

In a statement on Tuesday, the credit rating agency said, "Fitch Ratings believes that Indian banks’ exposure to the Adani group is insufficient in itself to present substantial risk to the banks’ standalone credit profiles. Indian banks’ Issuer Default Ratings (IDRs) all remain driven by expectations that the banks would receive extraordinary sovereign support, if needed."

"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," Fitch Ratings said. 

Stock prices of the Adani Group's companies have been sharply declining ever since Hindenburg Research came out with a scathing report accusing the group of stock manipulation and accounting fraud. Adani Group has vigorously denied the allegations. 

There have been concerns regarding the exposure of India's private and public sector banks in the Adani group. However, on Tuesday, Fitch Ratings said, “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.”

The US-based credit rating agency added that the SBI indicated on February 3, 2023, that state-owned banks’ share of the group’s loans had fallen to 31 per cent by end of 2022, from 55 per cent in 2016. 

“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. However, even if exposures were fully provisioned for, we do not expect it would affect banks’ Viability Ratings, as banks have sufficient headroom at their current rating levels,” Fitch Ratings said. 

However, it added that there is a risk 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. However, such a scenario would underpin the quasi-policy role of state-owned banks and reinforce our sovereign support expectations. These effects could be amplified if the controversy heightens financing challenges for other Indian corporates, increasing their reliance on local bank borrowings. Nonetheless, India’s corporate sector has generally deleveraged in recent years, reducing its exposure to refinancing risk,” Fitch Ratings added. 
 
Fitch Ratings further said, “When we affirmed the sovereign’s rating at ‘BBB-’ with a Stable Outlook in December 2022, we stated that a structurally weaker growth outlook that weighs further on India’s debt trajectory could lead to negative rating action. 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 credit rating agency said 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.