IndusInd Bank-like incidents not failures but episodes: Guv Malhotra

RBI is working to ensure frequency of such occurrence is less, he said

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Incidents like the one involving IndusInd Bank, or New India Cooperative Bank, should not be termed as failures. Instead, they should be viewed as episodes that can occur in a financial system which has a large number of players, Reserve Bank of India (RBI) Governor Sanjay Malhotra said on Wednesday. He, however, reassured that overall India’s financial system remains resilient.

 

In the post-monetary policy press conference, Malhotra said: “I would not call them total failures. They are episodes and we have to ensure through various means that these incidents happen lesser in frequency. For that, we have various tools – regulations, supervision, etc. The banks themselves have multiple layers – business unit layer, compliance layer, and audit layer. So, all of them have to work together and continuously try to improve the systems.”

 

Additionally, he assured that India's financial system remains resilient. Be it cooperative banks, non-banking financial companies (NBFCs), or scheduled commercial banks (SCBs), at the system level they are safe, secure, and robust, Malhotra said, adding that RBI has good systems in place to detect non-compliances and risks as early as possible and it takes pre-emptive as well as corrective action wherever required.

 

In his statement, Malhotra emphasised that financial soundness parameters of the banking sector continue to be robust. The liquidity buffer in the banking system is well above the regulatory threshold and profitability indicators are also healthy, reflecting robust operational efficiency of the system. Similarly, the system-level parameters of NBFCs too are sound, he said.

 

Last month, IndusInd disclosed to the exchanges that an internal review of processes related to its derivative portfolio revealed certain discrepancies, which will adversely impact its net worth by 2.35 per cent. Analysts estimate the hit on profit to be between ₹1,500 crore and ₹2,000 crore.

 

The bank has appointed an external agency – PwC – to independently review and validate the internal findings. Additionally, the bank has hired an independent professional firm to conduct a comprehensive investigation to identify the root cause of the discrepancies in the derivative portfolio of the bank. The firm has also been tasked with assessing the correctness and impact of the accounting treatment of the derivative contracts with regard to the prevailing accounting standards, as well as identifying any lapses and establishing accountability.

 

Amidst the turmoil, the central bank had to step in to issue a statement, addressing speculations surrounding the bank. The RBI assured the bank’s depositors to not react to speculative reports as the bank’s financial health remains stable and is being monitored closely by it.

 

In case of New India Cooperative Bank, the RBI superseded its board for 12 months and appointed an administrator to oversee the bank’s affairs during this period, after imposing business restrictions on the bank. These actions of the RBI were triggered by allegations of fund misappropriation by some bank staffers.

 

Additionally, the RBI in January superseded the board of Aviom India Housing Finance, citing governance concerns, and referred the lender to National Company Law Tribunal (NCLT) to initiate insolvency proceedings.

 

“Whenever such failures happen, we take risk-mitigation measures in terms of protecting the customers but also on the other side, we direct the boards to ensure that proper forensic and accountability studies are held so that whomsoever is accountable, whether they internal, external, or third-party service provider, they will be covered and actions will play out,” said RBI Deputy Governor Swaminathan J.

 

“We never waste a crisis,” he said, adding that there are learnings and the supervisory tools get better with each episode.

 

According to Swaminathan, RBI’s intention is to minimise and, more importantly, ensure that customers remain protected even if accidents play out. “In each of the episodes, we have taken adequate steps to ensure that customer inconvenience is minimised and customer money is protected to the extent as much as possible,” he further said.