The Reserve Bank of India is contemplating if the accounting lapses uncovered at IndusInd Bank pertaining to treasury operations should be classified as fraud.
According to highly sources aware of the matter, the central bank is in touch with Grant Thornton to take a call on this matter.
“The initial forensic audit report suggests that whatever lapses have taken place has been with the knowledge of people involved and it was not an inadvertent mistake or oversight,” said a senior official aware of the matter. “This has triggered the regulator to take a call on whether the matter should be classified as a fraud,” he added.
The normal procedure is for the bank’s board to decide whether of not a transaction if a fraud. However, the central bank can step in and nudge the board of a bank to declare a transaction to be a fraud, based on its own findings. Further, certain transaction being declared a fraud would ordinarily result in the matter being referred to the police authorities.
In fact, within days of making the Grant Thornton’s report public, the bank’s the former MD & CEO, Sumant Kathpalia and deputy CEO, Arun Khurana stepped down from their positions.
“I undertake moral responsibility, given the various acts of commission / omission that have been brought to my notice,” Kathpalia said in his resignation letter.
“Considering the recent unfortunate developments, wherein the bank determined an adverse accounting impact on P&L, on account of incorrect accounting for internal derivative trades, I having oversight of the Treasury front office function, as whole time director, deputy CEO and part of senior management of the bank, hereby resign, effective immediately," Khurana said in his resignation letter.
The exit of the two senior executives and a few more employees involved in the process, as reported by Moneycontrol on May 6 seem to suggest a deliberate skirting of processes and not an inadvertent error as claimed by the bank's former management in the investor call held on March 10.
Sources add that the RBI is expected to take a call on classifying the developments at IndusInd Bank as fraud in the coming weeks as further clarity emerges from the forensic audit on the overall financials of the bank.
So far, the bank has acknowledged that Grant Thornton's findings that incorrect accounting of internal derivative trades, especially in case of early termination, resulted in recording of notional profits. This is the principal root cause for accounting discrepancy.
Highly placed sources say the scope of Grant Thornton’s forensic audit is to review processes, including accounting and income recognition process of the bank, across businesses. “It is not limited to treasury related issue. This is why firming up on the findings is taking time,” said a senior banker who did not want to be named.
Meanwhile, EY, globally the largest audit firm, is examining discrepancies in IndusInd Bank’s microfinance book.
The regulator’s decision to classify certain activities of the bank as fraud would depend on Grant Thornton’s forensic audit report and EY’s report.
According to a stock exchange release on business update for March FY25 quarter, IndusInd Bank’s total advances and deposits stood at Rs 3,47,933 crore and Rs 4,11,140 crore respectively.
“The size of the bank and its positioning as India’s fifth largest private bank will also be weighed in by the regulator while taking a call on this matter,” said a senior banker.
An email sent to RBI seeking clarification on a likely fraud classification remained unanswered till publishing the article.
“The Bank is actively engaged with all regulators and will make all determinations and take actions as per applicable law," a spokesperson of IndusInd Bank said in response to Moneycontrol's email.
On March 10, IndusInd Bank revealed that an internal review of processes relating to certain derivative portfolio brough to the fore some discrepancies in these account balances, which could have an adverse impact amounting to approximately 2.35% of Bank’s net worth as of December 2024. The financial implication of these lapses is within the guidance provided by the bank. What is in the process of being ascertained is whether these lapses were willfully committed.
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