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Indian banks’ exposure to the Adani Group is not that large to affect credit quality but their risk could increase if the conglomerate becomes more reliant on loans, said Moody’s on Tuesday.
The group’s access to funding from international markets will be likely curtailed because of heightened risk perception, said the rating agency in a statement. Indian banks may become the main source of funding for the group in that case, resulting in increased exposure and greater risks.
The group, led by billionaire Gautam Adani, has been battling days of market turmoil after US short-seller Hindenburg Research on January 24 alleged it had engaged in stock manipulation and used tax havens. It also said the group had unsustainable debt.
ALSO READ: Bank credit profiles not at much risk from Adani exposure, says Fitch
Banks’ exposure to the group is less than one per cent of their total loans, said the agency, which has issued frequently asked questions about the risks.
In the last two weeks, equity and bond prices of Adani Group companies have dropped significantly. Adani has denied Hindenburg’s allegations, as sell-offs in the group’s stocks prompted flagship unit, Adani Enterprises Limited, to cancel a $2.5 billion share sale.
Moody’s said even if their exposure rises, the overall quality of Indian banks’ corporate loans will be stable. Corporates have deleveraged in the past few years. This is reflected in modest growth in their corporate loan books. Further, banks’ underwriting has been conservative, Moody’s said.
Any spillover effect on other Indian corporates would be credit neutral for banks. If they do have difficulty raising external funding from capital markets, their loan demand would grow and lead to greater funding requirements. On the other hand, however, banks would have stronger pricing power for loans.
There has been a tightening of the external funding environment for corporates since the second half of 2022. This has increased the relative importance of domestic banks as a source of funding. If this further accelerates, funding costs for banks may rise as they seek more funding to meet increases in loan demand from corporates.
However, as corporates flock to banks for funding, banks would have stronger pricing power for loans, which would allow them to defend their margins, said Moody’s.
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