Home / Industry / Banking /  Indian banks are prudent and they lend against fundamentals: Shaktikanta Das

Domestic banks are prudent and lend against company fundamentals, and have significantly improved their appraisal standards, RBI governor Shaktikanta Das said on Wednesday, when asked about lenders’ exposure to Adani Group.

“In RBI, we have made our own assessments... The large exposure guidelines prescribed by RBI are fully complied with by all banks," Das said.

According to Das, the strength, size and resilience of the Indian banking system is strong enough to be not affected by “an individual incident or a case like this". He said that questions with regard to bank exposure are being asked because of the changes in the group’s market capitalization, but banks give loans against other metrics.

“When banks lend money to a company or to a group of companies, they do not lend on the basis of market cap of that company; they do it on the basis of the strength of the company, the fundamentals of that company...," he said, adding that credit appraisal methods of Indian banks have significantly improved over the years.

Asked if banks should set aside more provisions against loans to Adani Group, Das said that during covid, most banks built up their capital and are well-capitalized. “They are prudent. Bank managements will decide whenever they feel there is a need for additional provisions," said Das.

Domestic banks have an exposure of $9 billion (over 74,000 crore) to Adani Group companies and, as per disclosures, India’s top three state-owned banks have an aggregate exposure of close to 40,000 crore to the group. This is 0.8% of the aggregate gross advances of these three banks. Banks and the regulator have asserted that there were no concerns emanating from their loans and bank guarantees to the embattled group, which has seen its stock value plunge and later recover after a US-based short seller, Hindenburg Research, accused the group of stock manipulation and accounting fraud. Adani Group has denied these allegations.

“Individual cases and their numbers, as you are aware, we do not discuss. Having said that, let me mention in addition because so many questions are being raised," Das said.

Das then pointed out some regulatory measures of RBI that he said have strengthened the resilience of the banking system. “We have issued guidelines about the functioning of the audit committees; we have issued guidelines for the functioning of the risk management committees; we have now made it mandatory for appointment of chief risk officers; and have also made it mandatory for appointment of chief compliance officers," he said.

RBI, he said, has also given the desired level of autonomy to the chief risk officer and the chief compliance officer, with regard to their functioning within the bank. “We have also rationalized, in the last two years, the large exposure norms and all that I would like to add at this point in time is that the Indian banking sector, including the NBFC sector, continues to be resilient and strong," he said.

Under RBI’s large exposure framework, banks can lend up to 25% of their total tier-I capital to a connected group of companies, and 20% to a standalone entity.

Meanwhile, deputy governor M.K. Jain said that domestic banks’ exposure is against the underlying assets, operating cash flows and the projects under implementation, and is not based on market cap.

“The exposure as of now is not very significant across all banks and NBFCs. The exposure of domestic banks against shares is insignificant," Jain said.

Shayan Ghosh
Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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