IndusInd Bank Crisis Explained: What’s Fueling The Wave of Exits And Should Customers Be Worried?

In one of the biggest banking crises that was ever seen in India, the IndusInd Bank has been facing financial discrepancies related to its currency derivative transactions over the past seven or eight years which will result in a financial hit of Rs 1,600 crore.

The Reserve Bank of India (RBI) has also granted CEO Sumant Kathpalia an extension of just one year, which has raised concerns about succession planning and internal governance.

Recent Developments

As per media reports, recently the private lender's microfinance arm Bharat Financial Inclusion Ltd is seeing more and more exits, since officials that have been appointed by the bank are stepping aside.

These exits follow enhanced scrutiny into the  bank's microfinance book, as the bank has disclosed incorrect balances and poor provisioning.

What Is The IndusInd Crisis?

The private lender's derivative discrepancies highlight weaknesses in its internal controls and risk management practices.

IndusInd Bank has also taken corrective actions and the concerns over CEO succession can also possibly lead to regulatory oversight and market uncertainty.

The problem arose because the bank engaged in internal derivative trades for low-liquidity instruments instead of hedging through external counterparties. These instruments included three-to-six-year yen borrowings and eight-to-ten-year dollar borrowings.

Consequently, external trades were marked to market value, while internal trades relied on swap valuations and as a result there were mismatches in financial reporting because the two trade legs fluctuated over time but were expected to converge at maturity.

But, the practice went uncorrected for seven long years, until the issue was finally discovered when the central bank issued new guidelines, which prompted the bank to review its derivatives portfolio.

Following this, the bank has unwound all internal derivative trades and no longer holds unhedged positions. The bank has shifted to hedging foreign currency borrowings exclusively through external counterparties.

Additionally, in order to ensure transparency the bank has engaged an external agency to conduct an independent audit and has formally notified the central bank about this issue?

Should Customers Be Worried?

The Reserve Bank of India, in its response to the whole crisis said that "there is no cause for concern" for the depositors of IndusInd Bank, amid the recent concerns around the bank's financial discrepancies.

The central bank added that there has been some speculation relating to IndusInd Bank in certain quarters, possibly arising from recent events related to the bank.

RBI also added that the private lender is well-capitalised and the financial position of the bank remains satisfactory.

Therefore, customers will not be affected.

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