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.
 
Fitch stated on 3 February 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.
 
The State Bank of India indicated on 3 February 2023 that state-owned banks’ share of the group’s loans had fallen to 31% by end-2022, from 55% in 2016. 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. 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.
 
Banks could have some unreported non-funded asset exposure, such as commitments or through holdings of Adani group bonds or equity, particularly as collateral. However, we expect any such holdings to be small compared with loan exposures, and do not believe they would be material for Fitch-rated Indian banks.
 
That said, 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.
 
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.
 
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 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.