MUMBAI: Due to their exposure to the Adani group, banks face low levels of risk, according to international rating agencies Moody's and Fitch. However, the risk could increase in the future.
Moody's estimates that banks have less than 1% of their total loans exposed to Adani Group. Although public sector banks have a greater exposure than their private counterparts, the majority of banks only account for less than 1% of their loans. Due to the group's increased perception of risk, it may be difficult for them to obtain funding from international markets. Moody's said that in that scenario, domestic banks might become the group's primary funding source. This would raise banks' risks and increase their exposure to Adani.
Two things are reassuring rating agencies: the loans are evenly distributed across all banks. This guarantees that each bank has sufficient earnings or capital to cover losses in the event of a loan issue. Second, the group companies have a lot of assets and good cash flows, so even if the promoter is having problems, there is still a lot of value in the business.
“For Fitch-rated Indian banks, we believe that loans to all Adani group entities typically account for 0.8%-1.2% of total lending, or 7%-13% of total equity. Because so much of it is connected to carrying out projects, it is highly unlikely that all of this exposure would be recorded, even in a distressing situation. In a statement released today, Fitch Ratings stated, "Loans involving projects still under construction and those at the company level could be more vulnerable."
Fitch says that if foreign banks reduce their exposure or investor appetite for the group's debt weakens in global markets, public sector banks may be pressured to provide Adani entities with refinancing. Our assessment of these banks' risk appetite may be impacted by this, particularly if capital buffers are not built in a proportionate manner. Fitch Ratings stated, "However, such a scenario would strengthen our sovereign support expectations and underpin the quasi-policy role of state-owned banks."
A cycle of difficulties has begun for the group as a result of Hindenburg's short-selling of Adani stocks, which resulted in the publication of a report containing allegations against the group. Bond prices fell as a result of international bond investors selling their holdings as a result of the share price collapse. Credit rating agencies are concerned that the company's credit profile could suffer as a result of the negative sentiment in the bond market. By prepaying some debt, the group has attempted to break the cycle of negative feelings leading to negative actions.