A Rs 2,100 crore accounting discrepancy at IndusInd Bank caused its shares to plunge by 27 percent across bourses after the bank promised sufficient reservation funds and capital to cover for it.
The accounting discrepancy at IndusInd Bank came to notice during September-October 2021 and the bank submitted its initial findings regarding this matter to the RBI during the previous week. The bank-appointed external agency needs to complete its assessment before disclosing the final count which should be ready by early April.
The stock exchange filing by IndusInd Bank on Monday revealed that internal examination found some inconsistencies in derivative transactions affecting net worth by around 2.35 percent during the period December 2020 to December 2024.
Commercial experts suggest the discrepancy includes absolute amounts of Rs 2,100 crore.
An external agency both reviews and validates the bank’s internal findings while this process takes place simultaneously. The bank maintains sound capital levels and business performance to withstand the single-time financial impact detected in its derivatives portfolio.
The identification of this issue came directly from the banking institution. The bank’s existing capital reserves along with its reserves are adequate to handle this situation to full extent. Mr Katpalia said.
The stock price of IndusInd Bank experienced a 27.17 percent devaluation which resulted in a closing price of Rs 655.95 on the BSE. The stock reached its lowest point since January 2019 at Rs 649 per share before ending in a downward decline of 28 percent from Rs 900.
The derivative portfolio imbalance has been recorded in books during a 5 to 7-year period before April 1, 2024 according to Mr Kathpalia during the late Monday night analyst call.
Even though IndusInd Bank submitted to multiple audits from internal and statutory and compliance sectors along with RBI examinations the treasury discrepancies remained hidden.
The bank started its internal trade book review upon receiving the RBI circular in September 2023 declaring April 1, 2024 as the date to terminate internal derivative trading operations.
The external review of our (derivatives) business commenced after we noticed discrepancies in October before hiring the third party agency. According to Mr Kathpalia we expect the external agency report to pinpoint all gaps between March and early April.
Mr Kathpalia disclosed that IndusInd Bank provided an initial disclosure about this inconsistency to RBI last week.
When analysts asked about his MD & CEO reappointment after discovering this issue Mr Kathpalia stated that “Of course this would have a bearing because they were aware of the issue”.
The Reserve Bank of India granted Mr Kathpalia a one-year term extension beyond March 23 2026 while the bank had requested three years.
The officials behind this decision have failed to provide an explanation concerning their selection of only one year of service for me. My leadership methods at the bank seem to make them uneasy which they will continue to observe with respect.
This evaluation becomes essential in order for the bank to determine future leadership. During my time at the bank both BAU activities and the growth initiatives will continue with no interruptions according to Katpalia’s assessment.
RBI’s Reaction to the IndusInd Bank Lapse
The Reserve Bank of India has not responded to our request for comment sent by Reuters email.
The Asset Liability Management and treasury departments of banks had permission to perform internal swaps that exchange cash flows before the April 1, 2024 start of new bank investment requirements.
The early closure of these agreements caused IndusInd Bank CEO Sumant Kathpalia to report the profit but skip accounting for the losses during his Tuesday statement.
The RBI aims to verify whether banks with substantial foreign liabilities escaped previous accounting of losses from internal hedging operations according to its second reliable source.
The central bank possesses the power to prod lenders toward obtaining independent audits in case discrepancies appear during evaluations according to this individual.
Evidence indicates that no widespread issue persists according to inside knowledge which informs us about the central bank’s perspective.
The RBI asks for bank data during regular audits but the recent data request indicates that it wants to avoid being unprepared if the issue expands to affect the entire system according to this audit source.
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