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India banks sound, not lending on market cap: RBI Governor

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Indian banks and non banking finance companies (NBFCs) with exposure to the Adani Group are sound and are in compliance with the regulations regarding exposure limits, Reserve Bank of India (RBI) governor Shaktikanta Das said. The perception created by the collapse in equity valuations of the group companies is not a reflection on the banks which lend against assets and cash flows, Das said.

“The strength, size and the resilience (of banks) is now much larger and much stronger to be affected by individual incident or case like this. Also, this whole perception is coming because of the market capitalisation or shares of the group. When banks lend money to a company or a group of companies, they do not lend on the basis of the market capitalisation of that company but on the basis of the strength and fundamentals of the company or in case of a greenfield project the anticipated cash flows,” Das said in reply to a question on the exposure of banks to the Adani Group.

Das said that banks have their own appraisals for loans to companies and appraisal methods of Indian banks have significantly improved over the years. He also said that the RBI has made its our own assessment on the financial sector exposure to the group and banks are in compliance with the large exposure framework of the RBI.

Questions on banking exposure to the Adani Group have surfaced after a sharp fall in the companies’ shares earlier this month after US based Hindenburg Research accused the group of mis-governance. The group’s securities have since recouped some of their losses.

Echoing Das’ comments deputy governor MK Jain said banking exposure is not based on the market capitalisation of the group. “The exposure as of now is not very significant across banks and NBFCs. The exposure against shares of domestic banks is insignificant,” said Jain said.

Earlier this month, a Jefferies report had pegged total Adani Group debt at Rs 1.88 lakh crore, 25% of which was loans from public sector banks, second only to the bonds which constitute 37% of the group's debt. SBI, due to its sheer size, is the top lender to the Adani Group. For public sector banks, their exposure to the group makes up only 0.70% of their total loans.

Das said over the last three to four years the RBI has taken a number of steps to strengthen Indian banks, with guidelines on governance, functioning of audit and risk management committees and making it mandatory to appoint a chief risk officer and chief compliance officer giving them the desired level of autonomy with regards to their functions.

“Indian banks have been very prudent and have utilised the post Covid times to build up their capital by utilising the surplus liquidity in the market, they are all well capitalised and are prudent. Bank management will take their decision whenever they feel there is a need for additional provisions to made. There are so many cases where there are early warning signals or proactively make provisions. So it’s a part of the regular risk management of banks,” Das said replying to a question on whether banks need to increase provisioning on the Adani Group.

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