'Banks, Indian family businesses linked at the hip': Aswath Damodaran flags 'dangerous mechanism' at play

Valuation guru Aswath Damodaran, also a Professor of Finance at Stern School of Business at New York University, told Business Today about the "weak links" that exist in the Indian banking system owing to their exposure to family group companies.

During a recent conversation with India Today Group's Global Business Editor Udayan Mukherjee, Damodaran said that Indian family group companies and banks have been closely linked in the past, which could be gleaned from the Adani-Hindenburg saga as well. Post Hindenburg's report on Adani, the conglomerate's debt exposure to Indian banks has come under the scanner.

“I think this is no secret that if you go back in time, Indian banking and Indian family group companies have been linked at the hip, which is you loan to a family group, and you don't do the due diligence that you would have done with an individual company,” Damodaran said.

Damodaran teaches corporate finance and equity valuation, and his insights into the financial world are sought after by many.

Damodaran emphasised that he wasn't alluding to any corruption or inefficiencies in the banking system but rather to the close relationships between lenders and the businesses they lend to. "The close relationships can lead to banks being lax in their due diligence, which can be a weak link in the Indian financial system," he said.

Damodaran stated that this issue has been around for quite some time and has not gone away despite being brought up by Raghuram Rajan, former Governor of the Reserve Bank of India.

“This is a fight that's been going back going back to the days of Raghu Rajan as you know when he brought this problem up to the surface, it's not a problem that's gone away. And it's a problem that I think India has to deal with, frankly, if it wants to become the economic power that it aspires to be,” Damodaran concluded.

He said this could lead to systemic problems as well.

"The problem with banks is risks and losses are not separable. If State Bank of India goes down, guess what, it's not just State Bank of India going down, it's going to bring down the banking system," he said.

Damodaran added that bank problems can't be seen in isolation while referring to the recent Silicon Valley Bank collapse.

"You won't even have noticed 16th largest bank goes down but it threatens to bring down the entire system. So unfortunately, in banking, there's no such thing as separability. So the big public sector banks have troubles and guess what? It's everybody's problem," Damodaran said.

Also read: 'Credit Suisse would not have survived': Swiss FM defends deal with UBS, says other options were riskier