IndusInd Bank Fiasco: PwC Reviewing Bank's Internal Investigation

Monday evening, IndusInd Bank informed exchanges that it had found accounting discrepancies in its derivatives portfolio, which could have a 2.35% impact on its net worth. This translates to a Rs 1,500-2,000 crore hit for the bank.

Around October 2024, the bank discovered that there was a gap in its derivatives portfolio, according to the person quoted above. This relates to internal trades the bank undertook over the last five to seven years. The bank runs a very large treasury book, where the size of the discrepancy is rather small, this person said.

Immediately after the bank noted the discrepancies, it initiated an internal review of the matter and appointed PwC to externally validate the review. Since the bank was conducting its own checks and data reconcilliation took time, it was only able to arrive at the actual reason behind the discrepancy and the financial impact now, the person said.

In its third quarter disclosures, IndusInd Bank said that the notional value of derivatives, foreign exchange contracts and options worked out to over Rs 15 lakh crore. This was against risk weighted assets worth Rs 17,022 crore, as of Dec. 31.

Monday evening, IndusInd Bank informed exchanges that it had found accounting discrepancies in its derivatives portfolio, which could have a 2.35% impact on its net worth. This translates to a Rs 1,500-2,000 crore hit for the bank.

Around October 2024, the bank discovered that there was a gap in its derivatives portfolio, according to the person quoted above. This relates to internal trades the bank undertook over the last five to seven years. The bank runs a very large treasury book, where the size of the discrepancy is rather small, this person said.

Immediately after the bank noted the discrepancies, it initiated an internal review of the matter and appointed PwC to externally validate the review. Since the bank was conducting its own checks and data reconcilliation took time, it was only able to arrive at the actual reason behind the discrepancy and the financial impact now, the person said.

In its third quarter disclosures, IndusInd Bank said that the notional value of derivatives, foreign exchange contracts and options worked out to over Rs 15 lakh crore. This was against risk weighted assets worth Rs 17,022 crore, as of Dec. 31.

On Monday, the bank arranged a hurried analyst call to discuss its findings. On the call, Sumant Kathpalia, managing director and chief executive officer of IndusInd Bank, explained that the issue was a set of "internal trades" the bank undertook in its derivatives portfolio.

As part of its business, the bank regularly borrows foreign currency funds. Internal trades are undertaken in long term foreign currency borrowings, to protect the balance sheet.

Certain transactions, such as a three-to-five year Yen borrowing, or an eight-to-10 year dollar borrowing from multilateral funds are usually swapped to rupee to hold on the balance sheet. Such swapping involves a two pronged transaction. The first, an internal leg, requires the bank to swap the currency at a certain cost. The second, or external leg of the transaction, sees the trading desk hedge the foreign currency swap at marked-to-market rates.

Typically for the duration of the contract, the swapping cost and hedging cost vary, but eventually converge when the contract matures, Kathpalia told analysts.

The issue, however, was that starting April 1, 2024, the RBI had barred banks from doing internal derivative trades. IndusInd Bank, after discovering that such trades were active in its book, was required to unwind them before maturity.

This is leading to a hit on the bank's earnings in the fourth quarter. Analysts estimate that this will result in a 25% hit to the bottomline.

The impact on IndusInd Bank is likely worsening because the latest announcement comes on the heels of the leadership stress at the bank. On Friday, RBI gave a one-year extension to Kathpalia as MD and CEO of the bank, as opposed to the board's request for a three-year extension.

This is the second time that the RBI has given a shorter extension to Kathpalia. In March 2023, RBI only gave a two year extension, while the board then sought three years.

According to the person quoted above, while the RBI has not explained why it is giving shorter extensions, the message is clear. The regulator is not convinced with Kathpalia's leadership at the bank.

Now the bank's board has to decide if it intends to look at internal or external candidates to succeed Kathpalia when he leaves the bank in March 2026. While addressing analysts on Monday, Kathpalia said that he would remain committed to the bank for the year he will serve as MD and CEO.