IndusInd Bank Flags 2.35% Net Worth Impact From Accounting Discrepancies In Derivatives Portfolio

IndusInd Bank Ltd. said on Monday that it has identified accounting discrepancies of 2.35% of the bank’s net worth as of December 2024 in its derivatives portfolio during an internal review and that the lender has appointed an external agency to independently review and validate its internal findings.

The disclosure followed the Reserve Bank of India’s September 2023 guidelines on bond investment categorisation and valuation. "A final report of the external agency is awaited, and based on which the bank will appropriately consider any resultant impact in its financial statements," the bank said in its notifications to the exchanges.

Overall, the bank's profitability and capital adequacy remain healthy to absorb this one-time impact, it added.

According to the bank, this will have an approximate impact of Rs 2,100 crore, the management said in an analyst call.

However, it is difficult to say whether the impact estimated by external validation will be exactly what the bank has found and it should be range-bound and not materially different.

"The RBI continues to do thematic reviews across regulated entities, and there is nothing material right now that should worry us," the management said.

For the quarter ended December, the private sector bank's net worth was Rs 65,102 crore, higher than Rs 58,841 crore a year ago. Its capital adequacy ratio was at 16.46% at the end of December.

On the discrepancies in the bank's derivatives portfolio, the management said that it does not involve any client trade and is entirely involved in the bank borrowings.

These derivative trades took place over five to seven years ago and came to light when the bank took the review of the portfolio after the RBI's framework.

"We are no longer doing any such transactions owing to RBI guidelines. We came upfront since the impact was material in nature, and this impact is only an internal estimate. The bank has looped in RBI in the matter," the management said.

While the management declined to answer why such discrepancies were not found earlier, he said that IndusInd Bank is in the process of getting deeper answers on these questions.

In September 2023, the RBI said that banks are allowed to categorise their entire bond investment portfolio into three classifications, including held to maturity, available for sale, and fair value through profit and loss. The new regulations integrate the existing sub-category of held-for-trading into the last category.

After transitioning to this framework, banks are not allowed to reclassify investments between these two categories without the approval of the boards, as well as the regulator.

The norms mandated that securities that are classified under the HFT subcategory within FVTPL should be fair valued on a daily basis. Other securities in FVTPL will be fair valued at least on a quarterly, if not on a more frequent, basis.

Under the new norm, banks must categorise bonds as HTM on a permanent basis, with the exception of 5% of the portfolio that can be withdrawn throughout the year.

The impact of these discrepancies in the derivative portfolio has come at a time when the bank is already struggling from the stress in the microfinance institution space, which could have had an impact on the CEO's shorter extension period.

For the quarter ended December, the bank's MFI book was Rs 32,564 crore, forming 9% of its total loan assets. Total advances grew 12% on year to Rs 3.66 lakh crore.