The health of the Indian banking sector, especially its corporate book, is at a decadal best, with gross non-performing assets less than 10 per cent, down from over 15 per cent during the peak of asset quality issues in FY18-19. But how long will this party last? Ask any economist or banking sector expert, and the response will be that with the overall corporate leverage at a muti-year best, India Inc is unlikely to create headaches for the banking system any time soon.

Adverse rating

But are we ignoring two large time bombs, which collectively account for nearly ₹2-lakh crore of exposure, namely Adani Group and Vodafone Idea? Adani Group’s banking sector exposure is pegged at about a trillion rupees, or 1.2 per cent of total lending, according to Fitch estimates. Its group companies are standard assets for banks and, in fact, a bank chief, during an earnings presentation, reiterated that none of the group’s exposure turned even a special mention account (an indication of stress) so far for the bank or for the sector. As much as this is assuring, we need to keep a watch on what the rating agencies may be up to. S&P downgraded a few Adani group entities earlier last week, followed by Moody’s last Friday. These downgrades may prompt banks to start accounting for probable loan losses as a measure of prudence and if more adverse rating action follow, that is enough to trigger a domino effect on the banking system.

After a disastrous follow-on public issue, the group has sought to raise $1-1.5 billion. Confidence capital must flow in soon to keep the rating agencies happy.

Yet, with adequate cashflow-generating entities, Adani could be on a better footing compared to Vodafone Idea. The government recently agreed to convert its AGR dues to equity. But this doesn’t seem to be enough for banks to open the pursues once again. For one, though still a standard account, most banks, as a precaution, have taken adequate provisioning on their exposures. This is somewhat barricading them from increasing their exposure to Vodafone Idea.

Second, with the government distancing itself taking any operational responsibilities, it puts the ball back on the promoters’ courts to deploy capital and bring in a new investor; both have been in the works for long and are yet to fructify. Vodafone Idea and its bankers are surviving on borrowed time. Operationally challenged, we may be at the cusp of another bad loan mess. After all, how damaging a 0.5 per cent loan exposure could be for banks was revealed by the IL&FS saga. Hopefully, that shouldn’t repeat.