Amid IndusInd fallout, RBI examines derivatives exposures of some banks

India's central bank is examining derivatives exposures of some private and state-run banks days after IndusInd Bank disclosed lapses in its derivatives accounting, three sources said on Wednesday. 

The Reserve Bank of India has asked lenders for details of their overseas borrowings and deposits as well as their forex hedge positions, the sources said.   

On Monday, private lender IndusInd Bank flagged a 2.35 per cent hit to its net worth due to an underestimation of hedging costs related to forex transactions. 

"The RBI wants to confirm from banks whether the hedge effectiveness is perfect and if IndusInd's issue is part of a bigger problem," one of the sources said. 

The sources did not wish to be identified as they are not allowed to speak to the media. 

The RBI did not immediately reply to a Reuters email seeking comment. 

Before new investment norms for banks kicked in from April 1, 2024, banks' asset liability management and treasury desks were permitted to enter into internal swaps, where one cash flow is exchanged for another. 

An early termination of such deals led to the profit being accounted for while the loss was not, IndusInd Bank's CEO Sumant Kathpalia said on Tuesday. 

Now, the RBI wants "to ascertain that banks with heavy foreign liabilities are not exposed to a situation wherein any losses from internal hedges done previously have not been accounted for", the second source said. 

If any discrepancies are found, the central bank may nudge lenders to go for an external audit, this person said. 

Currently, "there is no reason to believe" that there is a systemwide issue, a separate source aware of the central bank's thinking, said. 

The RBI typically asks banks for data during routine audits, but the fact that it is being sought now "clearly indicates that the regulator does not want to be caught napping, in case it blows up into a systemic issue", this person said.   

IndusInd Bank shares gain 4.4%

 

 

Shares of IndusInd Bank recouped some losses on Wednesday after the lender's management and promoters tried to assuage concerns around its derivatives exposure. Following a slump of 27 per cent, shares of the private sector lender rose 4.4 per cent to end at Rs 685 on Wednesday.

  Managing Director and Chief Executive Officer Sumant Kathpalia said the discrepancy in its derivative portfolio was a one-time event and the bank will earn a profit in the fourth quarter as well as the financial year.

  Promoter Ashok Hinduja too has reassured investors that the lender's financial health was solid and that it would have full support if any capital needs arose. IndusInd Bank has also hired an external agency to independently review and validate the findings.  

“A final report is awaited, and based on that, the bank will assess any impact on its financial statements,” the bank had said in an exchange filing. (PTI)

 

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