In This Economy… IndusInd Bank’s Derivative Discrepancies Shake D-Street

Hello and Happy Tuesday! The week that went by was full of developments on RBI’s liquidity measures, with more dollar buy/sell swaps being announced by the regulator. The liquidity deficit is shrinking, but as past measures are unwound, the deficit will likely widen. The RBI is showing its hand by further infusing liquidity, which will aid in managing the situation. Remember we already told you that better liquidity management is key to delivering more rate transmission in the economy. We hope that these timely infusions continue! Now on to this week’s newsletter..Derivative Discrepancies Drive Down IndusInd Bank Shares On D-StreetIt probably is a terrible week for one private bank honcho in Mumbai, though. IndusInd Bank’s MD & CEO Sumant Kathpalia can’t seem to catch a break. The Reserve Bank of India only gave a one-year extension on his tenure at the bank, compared to the three years the board recommended. This is the second time that the regulator has given Kathpalia an altered term. In March 2023, while the bank’s board had sought three years, RBI approved only time till March 2025 for Kathpalia.Typically, such tenure extensions immediately lead to rumour mills spinning yarns about the regulator not being happy with the incumbent CEO. In the recent past, RBI’s tenure decisions have led to changes in top management at private banks (Rana Kapoor at Yes Bank, Shikha Sharma at Axis Bank, and Shyam Srinivasan at Federal Bank).But in IndusInd Bank’s case, the rumours probably did not have time to even start. More bad news followed. On Monday evening, IndusInd Bank informed exchanges that it had discovered some discrepancies in its derivatives book. These discrepancies would hit 2.35% of the bank’s net worth, which works out to around a Rs 1,500-2,000 crore financial hit.This is a large hit for any bank, especially if the bank is taking the full hit in one quarter. Analysts estimate a 25% hit to net profit for the year.The why of it all is the more complex discussion.As part of their regular business, banks take on foreign currency borrowings. Now IndusInd Bank has clarified that in long-term foreign currency borrowings, the bank was converting funds to rupees to hold on its balance sheet. This conversion is easier said than done. There is a two-pronged transaction that takes place in such conversions, where the bank will convert the foreign currency to rupees on a swapped cost basis, and the trading desk would hedge the exchange with a derivative contract on a mark-to-market basis. Now in normal transactions, the swapped cost and mark-to-market cost vary for the duration of the contract and then converge at maturity.The problem happens when you try to unwind the contract before it hits maturity. If there is a gap in costs, you need to pay from your pocket.In September 2023, the banking regulator released a master circular that prohibited such “internal trades” by April 2024, where the bank is essentially trading with itself. According to IndusInd Bank, it discovered that something was amiss in October 2024, after which it conducted its internal review, informed the RBI, and even appointed an external agency to verify its internal findings.Now, in March 2025, the bank has come out with a notice describing the financial impact. Questions, of course, are being raised as to why this notice has come six months after the bank discovered the discrepancies. Or, how could the bank have not noticed such a large internal trade that was active for at least six months since the RBI norms kicked in? Or why is the management not clarifying who is responsible for this fiasco? Or why did the auditors at the bank not catch this sooner?These questions remain unanswered for now. Abizer Diwanji, founder of Neostrat Advisors, told us that this is not a governance lapse at all. This is more of a rule lapse. To him, the situation looks like the bank was trying to hold on to the internal trade for a little longer than permitted because it made financial sense. However, the bet did not work out, as the dollar strengthened well past levels that would be appropriate within the bank’s risk parameters. This could be a far more believable response than what the bank is giving right now, Diwanji says.While addressing analysts on Monday, Kathpalia said that he feels that the RBI is likely uncomfortable with his leadership skills. This is likely a major admission by the CEO of a bank. Will the IndusInd Bank board back their CEO or take the RBI’s veiled message and look for a new candidate to succeed Kathpalia? That will be the next trigger for IndusInd Bank..FEATURE FIVE.Promoters exiting companies through the offer for sale route are under the tax scanner, sources tell Shrimi Choudhary.The government is closing in on the Digital Personal Data Protection Regulations, Rishabh Bhatnagar finds out.RBI is asking internal auditors at banks and NBFCs to verify compliance with gold loan guidelines, sources tell me.Commerce Minister Piyush Goyal is tightening his seatbelt for a second US visit, Rishabh tells us.Where did the cash Gensol Engineering declared with its financial statements go? Sajeet asks..Tensions are high among JP Morgan employees heading back to the office, who are complaining about loud offices, fluctuating internet, and sick coworkers. Read this crazy story from Fortune..Until next week, This is Vishwanath signing off!

In This Economy… IndusInd Bank’s Derivative Discrepancies Shake D-Street

It probably is a terrible week for one private bank honcho in Mumbai, though.

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In This Economy… IndusInd Bank’s Derivative Discrepancies Shake D-Street

It probably is a terrible week for one private bank honcho in Mumbai, though.

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