What did IndusInd Bank disclose on March 10?

IndusInd Bank revealed that an internal review found some discrepancies in the accounting of its derivatives portfolio.  

This is estimated to have an adverse impact of approximately 2.35% of the bank’s net worth as of December 2024, the private lender said. 

These discrepancies pertained to five to seven years prior to FY25. 

The Reserve Bank of India had issued a circular in September 2023 on classification, valuation and operation of investment portfolio of commercial banks, including accounting of derivatives, which was to be applicable from 1 April 2024. The bank noted some discrepancies in these account balances.

IndusInd Bank said it has also, in parallel, appointed an external agency to independently review and validate the internal findings. 

The audit by the agency is expected to be completed by 31 March 2025. Based on this report, the bank will “appropriately consider any resultant impact in its financial statements”. 

Can the internal estimate be materially different from what the agency comes out with?

The figure should not be much different and should be range bound, IndusInd Bank CEO Sumant Kathpalia told analysts but admitted that it would be “very difficult to answer that accurately right now”.

Since the bank had gone through multiple layers of audit and the auditors have signed the balance sheets for these transactions, how did this issue crop up in recent months?

The bank will be able to answer in detail once the review is complete by the external agency. It is in the process of finding out as to where was this missed. 

The bank's profitability and capital adequacy remains healthy to absorb this one-time impact, the lender added.

What are these trading derivatives?

These are hedging instruments of derivatives being used by the balance sheet management desk, which is also the ALM desk of the bank. On account of the foreign currency deposits and borrowing in foreign currency, which lead to a balance sheet and foreign currency for converting them into Indian rupee, the derivatives are used.

Where did the income line go to?

In most cases, it went to the net interest income line.

How did this issue, which involved a large amount, get identified?

In the process of aligning with RBI guidelines, the bank started reviewing the derivatives book. And as effective 1 April 2024, in line with the new norms, the practice of internal derivative trades had to be discontinued. 

“We started reviewing our internal trade book. And we observed some discrepancies in accounting of some of the trades, which was identified by September and October 2024. And then we hired the external agency to start reviewing our business. And that is why we are comfortable that by March-end or April early, we should be able to identify the gap,” IndusInd Bank CEO Sumant Kathpalia told analysts on 10 March. 

Was this internal trade practice stopped in due time?

“Yes,” said IndusInd Bank deputy CEO Arun Khurana. “So effective April 1, we can confirm that we have not entered into any internal trades.” 

The internal trades that were there prior to that period, which were existing on April 1, have been unwound and all according to mark-to-markets taken, he explained. 

“There will be a small PB impact, which will keep on dropping because these are unwinding of trades, which is insignificant in nature over the tenor or maturity of these internal trades. We now only do external trades with market counterparties for hedging our entire balance sheet foreign currency book,” Khurana told analysts.

But aren’t banks not allowed to run any book which is unhedged over the night? 

The bank does not run any unhedged positions on the balance sheet side of the business, Khurana said. 

“Whatever foreign currency comes, if we keep it in foreign currency, if we do not need to hedge it, it will be kept in foreign currency. If it is converted into INR, it is hedged for the underlying tenor, So that way, we were hedged all the time,” he elaborated.

How could these internal trades be so large?

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, Khurana told  analysts. 

Internal trades were entered only for trades which had little liquidity in the external market. For example, 3 to 5 years yen deposit coming in to be swapped into INR or 8 or a 10-year dollar borrowing from a multilateral. So these are the typical trades that were entered. The bank used to take market quotes from at least 3-odd different sources before these internal trades were contracted.

So when you do this internal trade with the trading desk, the trading desk will in turn go out and hedge the trade itself because you got to be within your risk limits that are put up or what they've got to work within. So the external trade was mark-to-market, while the internal trade was on swap cost accounting or swap valuation. These two legs would vary during the period of contract, but converge on maturity.

What could be an example of this?

When a dollar-denominated time deposit  maturing in say two years is opened by a non-resident customer, the bank may look at opportunities in India if it does not find a good lending opportunity in dollars. So what it does is convert the dollars to rupees to deploy it in India, with the regulatory condition that the foreign currency exposure is fully hedged.

Since the customer has to be paid in dollars at the end of two years, the dollar-rupee fluctuations creates foreign currency risk, which has to be hedged.

IndusInd Bank’s treasury department took a swap, with the internal derivative desk as the counterparty. The derivative desk, in turn, hedged this exposure with an external market participant. This was accounted for on a mark-to-market basis. Discrepancies are caused  when customers opt to withdraw deposits prematurely.

Is the management to blame?

The management clarifies that it has revealed the discrepancies out of its own and not because of auditors’ or the regulator’s observations. It could have waited for the agency to validate the accounts and then disclosed. But some raise the question that the management could have disclosed when the external agency was engaged after the issue was identified way back in October 2024.

What assurance did the RBI give on March 15?

The Reserve Bank stated that IndusInd Bank is well-capitalised and its financial position remains satisfactory. As per auditor-reviewed financial results of the bank for the quarter ended 31 December 2024, the lender has maintained a comfortable capital adequacy ratio of 16.46% and provision coverage ratio of 70.20%. The liquidity coverage ratio (LCR) stood at 113% as on 9 March  2025, as against regulatory requirement of 100%.

Basis the disclosures available in public domain, the bank has already engaged an external audit team (PwC) to comprehensively review their current systems, and to assess and account for the actual impact ( of not accounting for the year of accumulated losses from its forex derivatives book) expeditiously. 

“The board and the management have been directed by Reserve Bank to have the remedial action completed fully during the current quarter viz., Q4FY25, after making required disclosures to all stakeholders,” the central bank stated. 

“As such, there is no need for depositors to react to the speculative reports at this juncture. The bank’s financial health remains stable and is being monitored closely by Reserve Bank,” it added.

What did the board decide on March 20?

The board of directors decided to appoint an independent professional firm to conduct a comprehensive investigation to identify the root cause of the discrepancies, assess the correctness and impact of the accounting treatment of the derivative contracts with regard to the prevailing accounting standards and guidance, identify any lapses and establish accountability.

RBI also wants to rule out whether IndusInd Bank’s issue is part of a bigger problem in the banking sector.