RBI Launches Comprehensive Review of Banks’ Derivative Exposures After IndusInd Bank’s Significant Accounting Error
The Indian Reserve Bank carried out a broad review of derivative banking accounts across all institutions due to issues discovered at IndusInd Bank. The financial institution was forced to publish this information after finding a ₹1,530 crore difference in their derivative positions, so the industry began showing wide-ranging concerns.
Systemic stability motivates the RBI to examine private and public banks regarding their derivative exposures through a review procedure.
IndusInd Bank Flags Discrepancy in Derivatives Accounting
The underestimation of forex hedge accounting at IndusInd Bank resulted in a 2.35% reduction of its net worth, which the bank disclosed on Monday. The discrepancy in reported figures results primarily from the wrong methods used to evaluate hedging expenses connected to foreign exchange trading. IndusInd Bank must deal with an examination by the RBI, which wants to verify bank hedging procedures and assess whether the problems exist beyond IndusInd Bank.
Sumant Kathpalia explained that the premature termination of internal swap agreements initiated the unreported loss process. The bank used these internal exchanges for cash flow movement between banking units to trigger premature profit recognition without recording resultant losses. The RBI now needs confirmation from lenders regarding any similar exposure to issues with their foreign liabilities.
RBI Demands Data from Lenders on Foreign Liabilities
The Rashtriya Bank has instructed banks to provide detailed information concerning their foreign borrowings alongside detailed records of deposits and forex hedge position handling. The regulator instituted this measure to confirm that there are no inconsistent financial practices within the economic system. The central bank requires this request to find potential vulnerabilities that may generate risks that impact the financial system.
The RBI includes requests for detailed bank reports in its regular audits, yet the current timing suggests the institution wants to check for widespread problems. Financial institutions with substantial foreign liabilities must demonstrate to the RBI that they have considered all potential losses from their internal hedging methods. In case of discrepancies during the review process, the RBI can advise external auditing for institutions involved.
RBI Review Aimed at Preventing Future Risks
Reports about the IndusInd Bank problem have raised anxiety, but no information suggests this happened at multiple institutions. The Reserve Bank of India maintains complete financial system transparency while upholding its integrity standards. The central bank has the power to conduct investigations into newly found accounting inconsistencies, requiring banks to strengthen their measurement procedures.
