Adani row: Here's what Fitch Ratings, Moody's say on Indian banks' exposure to group's stock rout

Global credit rating agencies - Fitch Ratings and Moody's Investors Service - on Tuesday said that Indian banks' exposure to the Adani Group does not present any major risk to the banks' standalone credit profiles.

"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," the agency said in a statement.

"Banks' exposures to Adani are not large enough to affect their credit quality materially. We estimate that their exposures to Adani are not more than 1 per cent of their total loans. While we estimate that the exposures are larger for public sector banks than for private sector banks, they are smaller than 1 per cent of total loans for most banks," Moody's said.

According to Moody's, the exposures of Indian banks are spread across various entities in the group.

"We estimate that the bulk of the exposures are collateralised, either with operational assets or with projects under execution, rather than to the corporate level. While some of the exposures may be to the less mature assets of the group, the concentration on operating entities nevertheless reduces risks," Moody's added.

On February 3, Fitch Ratings said that the controversy over the short-seller report has no immediate impact on the ratings of Fitch-rated Adani entities and their securities.

"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," it said.

Fitch Ratings cited the State Bank of India's (SBI) information on February 3 that the government owned banks' share of loans to Adani Group loans had fallen to 31 per cent by end-2022, from 55 per cent in 2016.

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

According to Fitch Ratings, 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.

On the banks holding some unreported non-funded asset exposure, such as commitments or through holdings of Adani group bonds or equity, particularly as collateral Fitch Ratings said those could be small and may not be material for its rated banks.

Fitch Ratings and Moody's are of the view that the government owned banks could face pressure to provide refinancing for Adani Group when the foreign banks reduce their funding or the global investors do not go for the group's debt instruments.

Risk Appetite

"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 Ratings added.

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 said.

Fitch Ratings said 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.

"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," said Fitch Ratings.

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 the impact on growth would be likely to be small, Fitch Ratings remarked.

According to Fitch Ratings, India'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 Ratings said.