Indian banks’ exposure to the Adani Group is “manageable”, according to CreditSights. Or, by the end of 2022, at least.
The Reserve Bank of India has reportedly asked the country’s lenders to submit information about their exposure to the Adani Group, according to the Economic Times. This comes after the market’s response to the report of the short seller Hindenburg made the company shares like, well, understand. (Even with Adani’s lengthy response, found here.)
Several Indian banks have now made public the amount of credit extended to various Adani companies at the end of last year.
On Monday, CreditSights published a summary of what we know so far. The company was one of the first to sound alarm bells over Adani Group’s debt levels – calling it “deeply overleveraged” in a note on August 22 – so it’s worth watching.
A note on Indian banks’ exposure — from the company’s financial analysts, not the company analyst who wrote the original skeptical piece — concluded that it was “manageable” late last year.
Adani said last month that 25 percent of its long-term debt was with state-owned banks until March 2022, and 8 percent with private Indian banks. It may prove that the banks with the most exposure are state-owned, given chairman Gautam Adani’s relationship with Prime Minister Narendra Modi.
The relationship may inform CreditSights analysts’ predictions that the conglomerate will not lose access to funding, although it will almost certainly have to pay.
If Adani is able to access funding as expected, current loans may not be affected and affect the bank’s bottom line, analysts wrote. However, India has regulatory limits on the amount of exposure banks can have to borrowers, so looking at banks’ exposures can be a guide to how much credit is available.
The first analyst covers the public sector. With some additional emphasis:
State Bank of India (SBI) announced its outstanding loan exposure to 0.88% of net loans, or ~INR 270bn at the end of Q3FY23, most of which was secured by cash-generating assets. No loan against shares was given to the group. The bank also has some unfunded exposures including letters of credit and bank guarantees but the specific amount was not disclosed.
Bank of Baroda announced that its total exposure is about a quarter of the large exposure framework (LEF) ceiling, i.e., ~INR 54bn or 0.60% of net loans at the end of Q3FY23, of which ~30% is for JVs with or guaranteed by the public sector. company.
Please note that the SBI estimate is a lower bound, as there are additional undisclosed exposures. Also Canara Bank, the third state-owned bank covered by the company, has not publicly disclosed anything about Adani.
The only private sector lender that has currently reported exposure is Adani, which also accounts for less than 1 percent of net lending:
Axis Bank declared total exposure (funded + unfunded + investment) to be 0.94% of net debt, or ~ INR 72bn at the end of Q3FY23, of which the breakdown is funded exposure (0.29% or INR 22bn), unfunded exposure comprising mainly letters of credit and mostly short-term bank guarantees (0.58% or INR 44bn) and investments (0.07% or INR 5bn). Exposure to the Adani Group is mainly to Ports, Transmission, Power, Gas Distribution, Roads and Airport operating companies. Separately, exposure to the Adani Group JV amounts to 0.27% of net loans or INR 21bn.
CreditSights estimated that Adani’s exposure to two other private banks it covered – ICICI Bank and HDFC Bank – was probably not “material” at the end of last year.
But while measuring a lender’s exposure as a percentage of net loans can be helpful, the most important figure may be exposure as a share of tier one capital. Indian regulators restrict banks from lending more than 25 percent of their capital stock to borrowers.
Analysts have a handy graph comparing the reported exposure to the maximum level for various lenders:
So, SBI has extended about a third of its maximum lending capacity (at least!) to Adani by the end of 2022, while Baroda and Axis both have 25 percent.
What about global banks? Will they go in for extra credit? CreditSights says it’s unlikely:
Foreign banks’ exposure to the Adani Group tends to be at the level of operating companies with access to cash flows. We don’t see foreign banks pulling the line for the group; they may be more cautious about increasing exposure though, leading to Adani Group being more dependent on Indian banks for advanced group funding requirements.
In other words, expect Adani to get most of its crisis-survival runway from domestic funds.