IndusInd Fiasco Impact: RBI Seeks Compliance Reports From Banks On Foreign Currency Borrowings

Senior supervisory managers of Reserve Bank of India are seeking out of turn compliance reports from all major banks on their foreign currency borrowings after IndusInd Bank troubles surfaced and the bank's share price nosedived over 28% resulting in its market cap falling below Yes Bank.

According to two people in the know, supervisors are seeking specific compliance reports, with details on how the foreign currency borrowings are held on bank books, how much has been converted to rupees and what their hedged position currently looks like.

While banks are expected to submit such compliance reports on a quarterly basis, RBI supervisors are seeking reports on the current position, out of turn.

Queries mailed to RBI were not immediately responded to.

The first person quoted above said that this is in light of what has happened at IndusInd Bank. On Monday, IndusInd Bank reported to the exchanges that it discovered discrepancies in its derivatives portfolio, following which its net worth would be impacted by around 2.35%. This adds up to a Rs 1,500 crore hit on the bank's earnings.

In later clarifications, the bank's management explained that there were certain internal trades involving foreign currency borrowings, in contravention with RBI guidelines on bank investments, were being unwound. This led to the bank recognising the large loss in the fourth quarter.

To be sure, RBI guidelines do not expressly prohibit any internal trades by a bank. They do however require banks to follow hedging rules and adequately mark their portfolio to market.

According to a senior official at a large private bank, concurrent auditors are equipped to find such gaps in the trading book of any lender. It is highly unlikely that such a large position went unnoticed for months, before the bank had to provide for it.