IndusInd Bank fallout compels RBI to begin industry-wide review of derivative books

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% 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.