Derivatives issue specific to IndusInd Bank, not an industry-wide problem, RBI review likely to say

IndusInd Bank

A Reserve Bank of India (RBI) review of banks’ derivatives positions, so far, has found that the accounting problem was specific to IndusInd Bank and not an industry-wide issue, four people aware of the development told Moneycontrol on March 19.

The banking regulator did not find discrepancies in most banks but some private lenders have been told to submit derivatives data, the sources said.

“The RBI has taken stock of the derivatives portfolio of most banks by calling the treasury desk. A few large private banks, who have large foreign deposits, were asked to submit details,” one of the sources cited above said.

The review was done to check the processes followed by the banks in taking positions on the derivatives portfolio against foreign deposits, source added. The central bank took note of the derivatives books and collated details of these trades, sources said.

Moneycontrol reported on March 12 that the central bank had begun a review of derivative books of private and state-owned banks after IndusInd Bank reported discrepancies in accounting related to forex derivatives.

Derivatives books are primarily financial contracts whose prices depend on the underlying asset, which most of the time is currency.

The review was done after IndusInd Bank on March 10 said an internal review of its derivative portfolio uncovered a potential 2.35 percent hit to its net worth, which stood at approximately Rs 62,000 crore as of March 31, 2024.

The review of the investment portfolio was carried out on the RBI’s directions issued in September 2023.

Through the review, the RBI wanted to know if banks were following the new derivatives rule and also check the internal compliance at the treasury desk.

According to the RBI Master Direction- Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023, banks have to categorise their derivatives portfolio into three fair value hierarchies — Level 1, Level 2, and Level 3 and disclose it in their financial statements.

Banks are not to pay dividends out of net unrealised gains recognised in the profit and loss Account arising on fair valuation of Level 3 derivatives assets and liabilities on their balance sheet. Such net unrealised gains on Level 3 derivatives shall be deducted from CET 1 capital, RBI norms say.

These directions aim to give a fillip to the corporate bond market, facilitate the use of derivatives for hedging and strengthen the overall risk management framework of banks.