MC EXCLUSIVE RBI ramps up scrutiny on treasury operations, derivatives books in private, foreign banks

Reserve Bank of India

The Reserve Bank of India (RBI) has increased its supervision on treasury operations, derivatives books, and hedging of foreign exposure trades of private and foreign banks, people aware of the development told Moneycontrol. The increased scrutiny comes in the wake of discrepancies reported by IndusInd Bank earlier this year.

Sources added that the central bank is also examining the derivatives portfolio and inspecting minute details of trades in the derivatives books that were transacted by private and foreign banks five to six years ago and hedged against foreign funds.

This is the second time the central bank has started reviewing the derivatives books of the banks. Prior to this, Moneycontrol on March 12 reported that the RBI began a review of derivative books of both private and state-owned banks after IndusInd Bank reported discrepancies in accounting related to forex derivatives.

The RBI has yet to respond to Moneycontrol’s emailed queries on this matter. The story will be updated when the response comes in.

The supervision has become more intense after the central bank said in its annual report that the RBI would continue with the supervisory initiatives aimed at early identification of risks and vulnerabilities, increase the focus on root cause of vulnerabilities, and harmonise the supervisory rigour across various segments of the financial system.

The review of the derivatives book of the banks started after the IndusInd Bank fiasco, where they have reported a discrepancy of Rs 1,959.8 crore. In an exchange filing on March 10, IndusInd Bank said that an internal review of its derivatives 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 banks’ investment portfolio was carried out on the RBI’s directions issued in September 2023.

Further, a Securities and Exchange Board of India’s (SEBI) examination revealed that figures pertaining to the discrepancies were not just being monitored by IndusInd Bank itself but were also to be submitted to the RBI. Internal emails between December 2023 and May 2024 showing discrepancies of Rs 1,572 crore, Rs 1,776.49 crore and Rs 2,361.69 crore, were circulated amongst the employees of the bank.

The management of IndusInd Bank was aware of the discrepancies in the derivatives books 15 months before the lender disclosed it to the exchanges, according to the SEBI’s interim order released on May 27.

SEBI's assessments revealed that the bank had noticed the incorrect accounting treatment of Derivative Contracts on September 26, 2023.

This was revealed after the bank, as per Reserve Bank of India's (RBI) master direction, created an inter-department team to probe the matter.