Last week, the Reserve Bank of India issued a statement that the financial health of IndusInd Bank (IIB) remains stable and is being closely monitored. The RBI relied on the audited capital adequacy ratio and liquidity coverage ratio to issue the statement of comfort. The need to issue such a statement arose after IIB disclosed discrepancies in its derivatives portfolio to the tune of around ₹1,600 crore.
From what is known till now, IIB undertook an internal review of processes relating to ‘Other Asset and Other Liability’ accounts of the derivative portfolio, post implementation of the RBI Master Direction Circular that was issued in September 2023 on the investment portfolio of commercial banks. The review process identified some discrepancies in the derivative account balances. IIB’s detailed internal review estimated an adverse impact of around 2.35 per cent of the bank’s net worth as of December 2024 — this could amount to around ₹2,000 crore.
The bank has appointed an external agency to independently review and validate the internal findings. These derivatives were being used by the balance sheet management desk, which also manages the asset and liability (ALM) portfolio. Since the bank has both foreign currency deposits and borrowings in foreign currency, this desk uses derivatives as a hedge against major fluctuations. IIB entered into internal trades only for transactions that had limited liquidity in the external market. The RBI Circular instructed banks to discontinue such internal trades from April 1, 2024. IIB discovered issues in accounting of these trades in September and October 2024.
Oft-asked questions
The usual questions are being asked whenever such revelations are made. Banks are being audited all the time — concurrent audits, internal audits, inspection audits and statutory audits. It surprises many that the internal trades discrepancy could have escaped all these audits. The risk management committee of banks would have been getting reports on ALM and the value of the derivatives portfolio — even they could not notice anything amiss. Similar questions could also be asked of the audit committee of the bank. It is hoped that the report of the external agency would call out any gaps that were found in any of the audits and the work of the committees.
The IIB episode appears to be an accounting mismatch and not a fraud or diversion of funds. After the IIB issue, many are questioning why the RBI has not mandated banks to transition to Ind AS accounting standards, which have detailed guidelines on accounting and disclosure of derivative transactions. The standards also ask entities to disclose a quantitative as well as narrative portion of their risk management policy. Since 2015 — when India transitioned to Ind AS — RBI has been looking at Ind AS in silos and not as a complete set of accounting standards. Sometime in 2016, the RBI asked banks to convert their financials to Ind AS so that they could get an idea about the impact. Recently, the RBI instructed banks to build an expected credit loss (ECL) model for loans. The September 2023 Circular of RBI has used concepts of Ind AS selectively — abbreviations such as SPPI, FVTPL and fair value hierarchy appear now and then in the Circular. Classification, recognition, measurement and disclosures under Ind AS are related to the business model of entities and are not just boiler-plate disclosures.
Hopefully, the IIB imbroglio would force RBI to give directions to banks to implement Ind AS in banks completely. Ind AS may not prevent accounting accidents such as the one that has occurred in IIB, but the detailed disclosures could assist identify potential areas of concern earlier. Both the treasury and the loan portfolio of banks would be impacted (probably adversely considering the present state of the markets) but over the years, the RBI has handled many such situations would aplomb. As a Japanese proverb goes, “The day you decide to do it is your lucky day.”
The writer is a chartered accountant
