Indian banks' exposure to Adani group is "insufficient in itself" to pose a substantial risk to their credit profiles, Fitch Ratings said on Tuesday.

Adani group has faced stock rout and questions after a US short seller Hindenburg Research came out with a damning report alleging financial and accounting fraud by the ports-to-energy conglomerate. Adani Group has denied all charges and threatened to sue Hindenburg.

"Fitch Ratings believes that Indian banks' exposure to the Adani group is insufficient in itself to present a substantial risk to the banks' standalone credit profiles," the rating agency said in a note.

Ratings of banks remain driven by expectations that the banks would receive extraordinary sovereign support if needed.

Fitch on February 3 stated that the controversy over the short-seller report had no immediate impact on the ratings of Fitch-rated Adani entities and their securities.

"Even under a hypothetical scenario where the wider Adani group enters distress, exposure for Indian banks should, in itself, be manageable without adverse consequences on the banks' viability ratings," Fitch said.

State Bank of India last week stated that its share of the group's loans had fallen to 31 per cent by 2022-end from 55 per cent in 2016.

"We believe loans to all Adani group entities generally account for 0.8-1.2 per cent of total lending for Fitch-rated Indian banks, equivalent to 7-13 per cent of total equity," the rating agency said.

"Even in a distress scenario, it is unlikely that all of this exposure would be written down, as much of it is tied to performing projects. Loans involving projects still under construction and those at the company level could be more vulnerable. However, even if exposures were fully provisioned for, we do not expect it would affect banks' Viability Ratings, as banks have sufficient headroom at their current rating levels." Fitch said banks could have some unreported non-funded asset exposure, such as commitments or through holdings of Adani group bonds or equity, particularly as collateral.

"However, we expect any such holdings to be small compared with loan exposures, and do not believe they would be material for Fitch-rated Indian banks." There is a risk that state banks could face pressure to provide refinancing for Adani entities if foreign banks scale back their exposure or investor appetite for the group's debt weakens in global markets, the agency added.

"This could affect our assessment of the risk appetite of such banks, particularly if not matched with the commensurate building of capital buffers. However, such a scenario would underpin the quasi-policy role of state-owned banks and reinforce our sovereign support expectations," it said.

These effects could be amplified if the controversy heightens financing challenges for other Indian corporates, increasing their reliance on local bank borrowings. Nonetheless, India's corporate sector has generally deleveraged in recent years, reducing its exposure to refinancing risk, Fitch said.

"We currently believe the economic and sovereign implications of the Adani controversy remain limited. However, there is a tail risk that fallout from the controversy could broaden and influence India's sovereign rating, with knock-on effects for bank ratings," Fitch said.

Adani group plays an important role in India's infrastructure construction sector.

"Infrastructure development may slow, curbing India's sustainable economic growth rate, if its ability to contribute to the government's infrastructure rollout plans is impaired, though we believe the impact on growth would be likely to be small.

"The country's medium-term economic growth could also be hurt if the group's troubles have substantial negative spill-overs to the broader corporate sector or significantly raise the cost of capital for Indian firms, dampening investment," it said, adding such risks are low.

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