Mumbai: IndusInd Bank Ltd flagged discrepancies worth about ₹1,530 crore in its derivatives account balances, which managing director and chief executive officer Sumant Kathpalia said could have led the banking regulator to allow him only a one-year extension instead of three.
An internal review of processes relating to accounts of IndusInd Bank’s derivative portfolio revealed these lapses, the lender said in a stock exchange filing on Monday. These amount to an estimated adverse impact of about 2.35% of the bank’s net worth of ₹65,102 crore as on 31 December.
On Tuesday afternoon, the IndusInd Bank stock plummeted 26% to ₹666.25 on NSE—a near four-year low—after opening the day’s trading 15% lower.
IndusInd Bank has appointed an external agency to independently review and validate the internal findings while keeping the Reserve Bank of India (RBI) in the loop.
The internal review was carried out following the implementation of revised norms issued in September 2023 under the RBI Master Direction – Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions). These were applicable from 1 April 2024.
Discrepancies pertain to derivatives
The discrepancies pertain to derivatives used by the bank as a hedge against foreign currency deposits or borrowings on the balance sheet, which need to be converted to the Indian rupee. The lapses stemmed from a mismatch as similar trades were being accounted for differently, which came to light while unwinding existing positions to comply with the revised RBI norms.
The final impact on financials will be decided based on the report of the external agency, Kathpalia said in an analyst call on Monday, adding that it is expected to be “range-bound” or in line with the internal estimate.
IndusInd Bank also clarified that its treasury department, as per norms, continues to undergo multiple concurrent audits on an ongoing basis. The current issue did not throw up any visible gaps till a few months back, which is when the bank decided to review the situation and “dig deeper” given also that the discrepancies pertain to a long period of time, new chief financial officer and deputy CEO Arun Khurana said in the call.
The bank remains healthy to “absorb this one-time impact” during the fourth quarter ending March 2025, but the issue could have had a bearing on the central bank’s decision last week to approve his reappointment only for a a year instead of three, Kathpalia said.
“That’s for the regulator to answer. This could have had a bearing because they were aware of the issue. There was some inkling towards the issue. I don’t know what is the rationale for them to give me one year, but if they’re uncomfortable with my leadership skills of running the bank, we have to respect that,” Kathpalia said in the call.
“I think this is a litmus test for the bank and from a succession point as to how we take the bank forward,” he said, adding that he doesn’t believe that regular course of business will be impacted or that the bank’s growth agenda will “get off the track”.
The issue at the bank comes a little over a month after chief financial officer Gobind Jain resigned from his position citing “opportunities” outside the bank. Kathpalia said while Jain was aware of this transaction, his resignation is not linked to “only to this transaction”. “He had a different narrative on why he was leaving. That has been the case, and we are fine with that.”
He added that the objective of the bank to declare the discrepancies was to disclose the lapses upfront rather than delaying them till after the external evaluation. “I don’t think that is the right way…The amount of the impact is of a material nature, so we thought it’s only prudent to come upfront based on our own internal review.”
Accounting discrepancies
The derivatives or hedging instruments were used by the balance sheet management or asset-liability management desks of the bank against foreign currency deposits or borrowings on the balance sheet which need to be converted to the Indian rupee.
The accounting discrepancies pertain to hedging instruments used by the balance sheet management or asset-liability management desks of the bank. The derivatives are used against foreign currency deposits or borrowings on the balance sheet which need to be converted to the Indian rupee.
This practice was being followed by the bank’s treasury department since the start of the derivatives desk 5-7 years ago, Khurana explained in the call. The large number came up because there was a process that was always being followed by the bank right from the inception of these transactions for the internal trades that were done by the desk.
Such internal trades were done for foreign currency which had liquidity in the external market, such as a 3-5-year yen deposit to be swapped into Indian rupee or an 8-10 year dollar borrowing from a multilateral. The bank used to take market quotes from at least three to four sources before getting into contracts. The issue, Khurana explained, possibly came up when the internal trade was done with the trading desk, and the trading desk in turn went out and hedged the trade itself because of the prescribed risk limits.
“So external trade was mark-to-market, while the internal trade was on swap cost accounting or swap valuations. These two legs would vary during the period of contract, but converge on maturity,” he said, adding that if the bank were to unwind the trade in the interim period to repay the borrowings, one of the trades was hitting the bank’s profit and loss whereas the other was hitting the asset book. “That is where the difference came in. This was the practice that was being followed.”
During the implementation of RBI’s revised circular, which required discontinuation of internal trades among other measures effective April 2024, the bank unearthed the large difference in account balances in September-October 2024. The bank then conducted the internal review before hiring the external agency.
“Effective April 1, we can confirm that there will be no internal trades in our book. The internal trades are for the prior period. Those existing on April 1 have been unwound and, accordingly, mark-to-market (MTM) has been taken,” he said, adding that the bank now only does external trades with market counterparties for hedging the balance sheet in the currency book.
In most cases, these hedges were accounted for under interest income. The bank said it is in discussions, likely with the regulator, on how to account for this hit.
“We are comfortable that by March-end or early April we should be able to identify the gap, and it seems to be in line with what we are saying. But we want to be very sure about it because it is still not validated completely,” Kathpalia said, adding that the impact will likely have to be taken on the profit and loss account.
“The bank has enough reserves as well as capital to manage this transition. I wanted to be upfront with you to say that we are in a position where we are seeing some losses coming in, rather than doing it in March-April.”
These lapses come at a time when IndusInd Bank is already facing a hit on financials due to stress in the lender’s microfinance (MFI) portfolio, which is expected to hurt asset quality in the current quarter.
Kathpalia said that delinquencies in the MFI portfolio seem to be stabilising and Q4 FY25 should be the “bottom of the pyramid on this” before asset quality and credit costs start improving Q1 FY26 onwards. He added that despite these accounting lapses, the bank’s overall performance in Q4 FY25 should remain as per guidance and the bank will continue to meet its targets.
“Our channel checks seem to suggest that such kind of losses are possible when the book is not fully covered (i.e., there are open positions and unhedged trades) and as per some treasury heads of banks, the new RBI accounting rules cannot solely explain the discrepancy,” Macquarie Research said in a note.
“IndusInd Bank has a large market share in NRI (non-resident Indian) deposits and has been offering higher rates to customers. NRI segment deposits at ₹58,600 crore grew by 39% YoY in Q3 FY25 vs overall deposit growth of 11% YoY. The bank’s market share in NRI segment stands at 3.9%, more than double its overall market share in deposits at 1.8%,” Macquarie said, adding that issues like this can create questions on the “robustness of the bank’s internal process and compliance”.
Khurana had said during his call that IndusInd Bank had no unhedged foreign currency positions.
