Adani case: Indian banking is resilient and unaffected, says RBI chief Das

Virendra Pandit

New Delhi: The Indian banking system is very resilient and will not be “affected by an individual case”, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Wednesday, referring to lenders’ exposure to the Adani Group.

As he asserted this, equity markets snapped their two-day losing streak, despite a relatively hawkish policy statement by the RBI, which raised the repo rate by 25 basis points on Wednesday. The market rebounded in information technology, metal, and Adani group stocks supported benchmarks. The S&P BSE Sensex zoomed 378 points, or 0.63 percent, to close at 60,664 levels, while the Nifty50 closed at 17,872, rallying 150 points or 0.85 percent.

On Wednesday, the RBI’s Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 6.50 percent to bring inflation back towards the central bank’s 4 percent target. The MPC also retained its stance of withdrawal of accommodation to ensure that inflation remains on target.

On the frontline indices, Adani Enterprises surged 23 percent as it led the winners’ list on the Nifty50. Adani Ports (up 9 percent), Bajaj Finance, HDFC Life, SBI Life, JSW Steel, Ultratech Cement, Infosys, Hindalco, Reliance Industries, Bajaj Finserv, Divis Labs, Cipla, Apollo Hospitals, TCS, HCL Tech, Wipro, and Grasim were other notable gainers.

Indian banks do not lend money to a company on its market capitalization, Das said amidst questions about their exposure to the Adani Group companies that saw their stocks crash last week. The appraisal to lend money is done on parameters such as the underlying assets of the company, its operating cash flows, and projects under implementation, among others, he said.

“We have made our own assessments. The large exposure framework of the RBI is fully complied with by all the banks. The strength, size, and resilience of the Indian banking system are much larger and stronger to be affected by an individual case like this,” Das said at the post-monetary policy press conference in Mumbai.

“They (banks) lend on the basis of the strength of the company, its fundamentals, their analysis of the projects, the anticipated cash flows, and many other appraisal methods. The appraisal processes of banks have significantly improved over the years. So, I would reiterate that the banking system is stable and continues to be strong”, he said.

M K Jain, Deputy Governor, RBI, said, “Our domestic banks’ exposures are against the underlying assets, the operating cash flows, and the projects under implementation, not based on market capitalization. The exposure as of now is not very significant across all the banks and NBFCs. The exposure against the shares of the domestic banks is insignificant.”

Das said the central bank has taken numerous steps in the past few years to improve banks’ resilience and governance. “We have come out with regular guidelines to regulate the governance in Indian banks. We have issued guidelines on the functioning of audit committees and risk management committees. We have now made it mandatory for banks to appoint chief risk officers and chief compliance officers. And, through our regulations, we have given the desired level of autonomy to these officers with regard to their functioning in the bank. We have also rationalized in the last two years the large exposure framework norms”.

Last week, an RBI statement said the banking sector remained resilient in its assessment, and lenders’ exposures to companies were well within norms. This statement came amid concern over lenders’ financial health because of the stock rout in the Adani Group.

As per reports, the banking sector had an exposure of around Rs 80,000 crore to the Adani Group companies, with the country’s largest lender—State Bank of India—leading the pack with Rs 27,000 crore.

“As per the RBI’s current assessment, the banking sector remains resilient and stable. Various parameters relating to capital adequacy, asset quality, liquidity, provision coverage, and profitability are healthy. Banks are also in compliance with the Large Exposure Framework (LEF) guidelines issued by the RBI,” the RBI statement said.

Separately, large banks said they are comfortable with their exposures to the Adani Group and did not see any concerns relating to repayments so far.

The loans are backed by tangible assets and cash flow, and the bank has not extended any loans against shares, SBI Chairman Dinesh Kumar Khara said recently.

“We do not envisage any kind of challenge in terms of their ability to service their loan obligations. As for market prices of stocks, it would neither impact margin calls nor affect loans they have taken from SBI,” he said, adding the group had an “excellent track record” for repayment in the past.

The RBI MPC’s decision to raise the repo rate by 25 basis points on Wednesday was not unanimous with four of the six members favoring the hike. Two, Ashima Goyal and Jayanth Varma, voted against it.

The Standing Deposit Facility (SDF) rate now stands at 6.25 percent while the Marginal Standing Facility (MSF) rate is at 6.75 percent. The SDF is the lower bound of the interest rate corridor and the MSF is the higher.

The MPC also retained its stance of withdrawal of accommodation to ensure that inflation remains on target, Das said. The decision on the stance too saw a voting pattern of 4-2, he said.

Taking into account the latest interest rate decision, the MPC has raised the repo rate by a total of 250 basis points since May 2022. At 6.50 percent, it is at its highest since February 2019.

Das said that inflation might remain above 4 percent in the next financial year (2023-24) with geopolitical factors, non-oil commodity price pressures, and volatile crude oil prices posing risks.

India’s economic activity is holding up well with the previous rate hikes still working their way, Das said. Consequently, further calibrated action was warranted to break the persistence of core inflation and to anchor inflation expectations, he said, emphasizing that the central bank would continue to keep a strong vigil.

With inflation seen at 5.6 percent in the fourth quarter of 2023-24 (April-March), adjusted for inflation, the policy rate still trails pre-pandemic levels, Das said.

Moreover, with liquidity in the banking system still at a considerable surplus–banks parked a daily average of Rs 1.6 trillion worth of excess funds with the RBI in January–the stance therefore still remains accommodative, he said.

Das reiterated on Wednesday that the stickiness of core inflation was a matter of concern and that the RBI should see a decisive decline in inflation.