RBI sharpens lens on forex liabilities after IndusInd turmoil

The Reserve Bank of India (RBI) is reviewing the derivatives books of private and state-owned lenders after IndusInd Bank reported discrepancies in accounting related to forex derivatives, Moneycontrol and The Economic Times reported on Wednesday.

RBI has reached out the lenders to review their hedging effectiveness and positions in the forex derivatives market, and has asked the banks to submit details of their foreign currency liabilities, including FCBR (B) deposits and foreign currency-denominated bonds, ET said.

In an exchange filing on Monday, 10 March, IndusInd Bank said an internal review of its derivative portfolio uncovered a potential 2.35% hit to its net worth, which stood at about Rs62,000 crore as on 31 March 2024.

During an internal review, the bank said it noted some discrepancies in the account balances relating to “other asset and other liability accounts of the derivative portfolio post implementation of RBI master direction-classification, valuation and operation of investment portfolio of commercial banks (directions), issued in September 2023.”

According to RBI’s 2023 guidelines, banks must organize their derivatives into three categories—Level 1, Level 2, and Level 3—and report these in their financial statements.

Banks are not allowed to use gains from Level 3 derivatives that haven’t been realized yet to pay dividends. These gains must be subtracted from the bank’s core capital, or Common Equity Tier 1 capital.

The rules aim to boost the corporate bond market, encourage the use of derivatives for risk management, and strengthen banks’ overall risk handling.

Meanwhile, in an exchange notification post market hours last Friday, 7 March, IndusInd Bank said RBI has okayed a one-year extension in the tenure of chief executive officer Sumant Kathpalia instead of the three-year tenor requested by the bank’s board.

On Monday, shares of the lender declined 3.86% to close at ₹900.6, while the broader indices remained unchanged.

In an analysts’ call on Monday, Kathpalia pointed to the discrepancies in accounting related to forex derivatives but didn’t disclose the process through which the gaps were found.

He said RBI was aware of the discrepancies related to the derivative traded.

“I don’t know the rationale behind them giving me a one-year extension,” he said, adding, “I think it is uncomfortable with my leadership skills in running the bank, and we have to respect that.”

A day later on Tuesday, 11 March, shares of IndusInd Bank plunged 27%.

Subsequently, in an interview to Mint, IndusInd promoter and chairman Ashok Hinduja backed Kathpalia, while also seeking to reassure investors.

“It’s a five-seven-year-old issue from when he was not heading the bank. In any case, nobody’s asked him to discontinue and RBI has given him the reappointment letter after knowing everything,” Hinduja told Mint.

On Wednesday, 12 March, shares rose about 4.4% from the previous day’s close to Rs684.70, snapping a five-day losing streak.

The regulator is reviewing banks’ hedging positions and gathering details on these trades, analysts said, while pointing out that its goal is twofold: to check if banks comply with derivative rules and to assess their internal treasury compliance.