The Reserve Bank of India (RBI) has begun a review of derivative books of both private and state-owned banks after IndusInd Bank reported discrepancies in accounting related to forex derivatives, sources have told Moneycontrol.
The banking regulator is taking note of the hedging positions entered into by banks and is collating details of these trades.
“The RBI has contacted banks to assess the hedging positions after the IndusInd Bank issue,” one of the sources said on condition of anonymity.
The RBI has yet to respond to Moneycontrol’s emailed queries. The story will be updated when the response comes in.
The purpose of this exercise is twofold, sources said. One is to ascertain if more banks are in non-compliance with the new derivative trades rule. Second, the regulator also wants to use this opportunity to assess the internal compliance of banks on the treasury front.
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, the 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.
On the currency derivative front, the central bank, through a January 5, 2024 circular, said that investors must ensure a valid underlying contracted exposure, which has not been hedged using any other derivative contract and that they should be in a position to establish the same if required.
This circular led to the decline in the open interest contract in the currency derivatives market on the National Stock Exchange.
In an exchange filing on March 10, IndusInd Bank said that 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 banks’ investment portfolio was carried out on the RBI’s directions issued in September 2023.
The bank noted some discrepancies in these account balances, CEO Sumant Kathpalia said in a late evening conference call but didn’t reveal the process through which the gaps were unearthed.
A day later, the IndusInd Bank stock crashed over 27 percent. Chairman Ashok Hinduja sought to reassure investors and it would be fully supported should any capital requirement arise.
On March 12 afternoon, the stock was trading at Rs 680 on the National Stock Exchange, up 3.7 percent, snapping a five-day losing streak.
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