RBI stepped in after IndusInd Bank 'delayed' provisioning by a year

Seeks CEO probables' names soon; bank mcap slips Rs 19K cr

IndusInd Bank’s alleged operational missteps, and the regulator asking it to declare its estimated losses to investors, culminated in the lender’s stock crashing 27 per cent on Tuesday, with market capitalisation falling by ₹19,000 crore.

 

Alleged non-compliance with accounting practices and a delay in rectifying discrepancies were held against the bank.

  On Monday, IndusInd Bank informed the stock exchanges the estimated adverse impact due to the derivatives portfolio was 2.35 per cent of its net worth as of December 2024 — the reason for the stock price plunge. The blow to share prices coincides with the Reserve Bank of India granting only one year’s extension to the bank’s managing director and chief executive officer, Sumant Kathpalia, despite the board approving a three-year reappointment, as informed by the bank on Friday. Banking sources said the board recommendation for a three-year extension did not seem to have been favoured by the regulator.

  In extending the CEO’s term by one year, the regulator seems to have communicated that the bank must send names for the new CEO as soon as possible, sources said. As is the practice, the bank has to suggest at least two names. Kathpalia’s term will end on March 23, 2026.  

  Moreover, there was a delay in identifying and classifying losses in derivatives. An email sent to IndusInd Bank remained unanswered till the time of going to press.

 

When a bank takes a foreign-currency exposure, the trading desk of the bank needs to hedge while converting it into rupees.  There is a cost in hedging. The trading desk transfers the cost to the asset-liability management (ALM) desk. When the foreign currency exposures are repaid, there could be either a gain or loss.

 

In IndusInd Bank’s case, the losses were shown as receivables, which were included in the intangible assets in the balance sheet.

 

In other words, the bank needed to make provisions, which were not made, banking sources said.

 

When the RBI’s “Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023,” came into effect from April 1, 2024, the bank found it difficult to comply with the norms due to its accounting practices.

 

Whenever a new norm is enforced, typically banks convey their compliance with the norm to the regulator within a quarter.

 

In this case too, most banks complied with the RBI norms by June 30, 2024. IndusInd seems to have initially indicated that it will do so by September, which it was unable to do. In addition, in July-September, the bank required provisioning for microfinance and jewellery loan portfolios, as mentioned in its earnings calls. 

 

Additional provisioning due to the derivatives portfolio would have put the bottom line under further pressure.

 

Then in November, it appeared that the bank appointed an external agency, PwC, to audit the derivatives portfolio. This might have been triggered by regulator’s prodding, industry sources said. IndusInd’s stock-exchange filing on Monday said it had appointed a “reputed external agency” to independently review and validate the internal findings.

  PwC also did not respond to Business Standard mail till the time of going to press.

  Until February this year, the bank was not able to comply with the norms. Then the RBI seems to have upped its ante, which compelled the management to convene a special board meeting and disclose the likely losses to the markets.

 

While the disclosure indicates a possible erosion of ₹1,500 crore, it is speculated that it may go up to ₹1,900-2000 crore. The final report from the external auditors is expected to quantify the gap.  While the alleged discrepant practice seems to have been prevalent over four to five years, about ₹1,200 crore seems to have been accumulated in the last two years or so, thereby accentuating the problem. “It is surprising that the bank’s internal and statutory auditors were unable to spot it,” said a source aware of the development.