How deficiencies in derivative accounting at IndusInd Bank came to the fore

IndusInd bank

A routine exit interview may have been the trigger for events that cost IndusInd Bank 2.35 percent of its net worth, a fall of Rs 20,000 crore in market cap.

Multiple sources with knowledge of the developments say that the seemingly sudden departure of the bank’s CFO Gobind Jain on January 17, 2025, may have set the stage for the lender to reveal serious lapses in its derivatives book.

Jain was the then chief financial officer of the bank. “He had a rather long exit interview with the central bank officials,” said a person who spoke to Moneycontrol on condition of anonymity. “The timing and conditions of his exit sparked some doubts,” he added. Jain's exit interview with RBI happened in the subsequent week of tendering his resignation to the bank.

To be sure, any key managerial person resigning from the company goes through an exit interview with officials at Reserve Bank of India. This is a normal procedure.

While Jain could not be contacted for comments on this matter, persons familiar with the development say he might have told the regulator that there could be deficiencies in the treatment of certain derivative trades.

On March 10, the management of IndusInd Bank indicated that during an internal review of processes relating to ‘Other Asset and Other Liability’ accounts of its derivative portfolio, the bank noted some discrepancies.

The internal review was necessitated by the implementation of a RBI circular called ‘Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 issued in September 2023, including accounting of derivatives, applicable from April 01, 2024,’

The discrepancies may impact the bank adversely with its net worth taking a hit of 2.35 percent as of December quarter, the bank said in a stock exchange filing March 10.

“The Bank has also, in parallel, appointed a reputed external agency to independently review and validate the internal findings. A final report of the external agency is awaited and basis which the Bank will appropriately consider any resultant impact in its financial statements,” it said in the stock exchange disclosure.

Sources say Jain believed these lapses should have been disclosed back in the December quarter of FY25 when there were rough estimates of the impact of these deficiencies.

“The bank seemed to have taken the the stand that it should fully evaluate the extent of corrective action required in the books of accounts before making a disclosure,” said another source.

While both views hold water, experts say from a fair disclosure standpoint, the then CFO’s contention seems more prudent considering how the situation has played out.

Nonetheless, it is understood that Reserve Bank of India officials stepped up scrutiny on the matter after the deficiencies were brought to light. “After almost a month long review of records, by end of February, a rough estimate of the pain to be absorbed by the bank was ascertained. Since the review process was going back and forth and taking longer time than anticipated, RBI insisted that an external agency be roped in to conclude a detailed investigation,” said another senior executive with knowledge of the matter.

PwC was appointed around the last week of February to conduct detailed investigations. The global consultancy major is expected to furnish its report to RBI by end of March.

The RBI did not respond to an email seeking details of its interaction with Jain.

What remains unclear is under what circumstances the bank started an internal investigation into its derivative operations. Market sources say that a whistleblower had internally flagged off these accounting deficiencies to the board somewhere around August or September.

An email sent to the bank seeking confirmation on this aspect remained unanswered till publishing the article.

Moneycontrol has also sought clarification from the bank regarding its knowledge of Jain’s exit interview with the RBI, and whether he had raised the issue of deficiencies in derivative accounting to the bank during his tenure. An email sent seeking clarification on this matter too remained unanswered till publishing the article.

Sumant Kathpalia, MD & CEO, IndusInd Bank, while addressing investors on the evening of March 10, said the then CFO, Jain, was aware of this (derivatives) transaction. “…but I don't think it is linked to only this transaction…., he had a different narrative on why he was leaving,” Kathpalia said on the call last Monday.

In fact, on January 18, when the bank told stock exchanges about Jain’s exit it said he had moved on from the bank to pursue other professional opportunities.

Jain’s resignation letter addressed to the CEO reads as follows: “As informed to you a few days ago I wish to resign from the services of the bank. I am keen to pursue opportunities outside the bank or within the promoter Group after having out in close to 3.25 years. As informed to you earlier I have to travel to USA in connection with my daughter’s examination and admission process. I hereby request you to relieve me ASAP. Happy to provide any support even after I am gone. “

Sources in the bank say Jain is no longer associated with the bank in any manner.

While the Street is right now penciling in a net hit of Rs 1,500 - 1,600 crore in March FY25 quarter, people with knowledge of developments say it may be too soon to conclude that this is the final figure.