IndusInd Bank CEO On Discrepancies In IndusInd Bank's Derivatives Portfolio N18V CNBC TV18 Exclusive

Summary

Indicon Bank's MD and CEO, Suman Katala, addresses recent challenges following a significant stock decline, revealing a ₹1,500 crore loss due to misaccounting in the bank's derivatives portfolio. The issue arose from differential accounting practices between internal and external trading desks, which led to discrepancies in currency risk management. Discovered during an internal review in late 2024, the problem was linked to premature derivative deal terminations. Despite the issue being spread over several years, its financial impact only became evident this year. The bank responded transparently, disclosing the findings after appointing an external agency to assess the situation.

Takeaways

• 😀 Indicon Bank's shares have been under pressure due to a financial loss linked to its derivative portfolio, amounting to approximately ₹1,500 crores.
• 😀 The loss was primarily caused by an accounting anomaly in the hedging of foreign currency liabilities through derivative instruments.
• 😀 The issue was discovered during the review process for compliance with new Reserve Bank of India (RBI) investment rules that are set to take effect in April 2024.
• 😀 The discrepancy in the derivative accounting method had been ongoing for about 5 to 7 years, but the impact was not fully realized until recent internal reviews.
• 😀 The problem arose specifically due to premature termination of derivative deals, which caused a larger-than-expected loss in FY 2023-24.
• 😀 CEO Suman Katala revealed that the bank appointed an external agency in October 2023 to assist in identifying and resolving the issue.
• 😀 The external agency was tasked with reviewing the derivative accounting process and ensuring compliance with new treasury backend systems.
• 😀 The loss is estimated at ₹1,500 to ₹1,520 crores, though some analysts have speculated a wider range of ₹500 crores to ₹2,000 crores.
• 😀 The external agency was not hired due to RBI pressure but as a proactive measure by the bank to address potential gaps in its accounting processes.
• 😀 The discrepancy was related to a difference in accounting methods between the bank's internal trading desk (using hedge accounting) and external desks (using mark-to-market accounting).

Q & A

What caused the significant drop in Indicon Bank's stock price?

The bank's stock price dropped by about 30% over two trading days due to the discovery of an estimated ₹1,500 crores in losses. These losses stemmed from an understatement of costs related to the bank's derivatives portfolio.

What was the role of the Reserve Bank in the situation with Indicon Bank?

The Reserve Bank of India (RBI) granted a one-year extension to CEO Suman Katala, which was different from the three-year term recommended by the board. However, the RBI's direct involvement with the loss discovery or the derivative issue is not mentioned in the script.

How did the bank discover the problem with its derivatives portfolio?

The issue was discovered during a review of the bank’s processes in line with compliance to the RBI’s new circular on investment portfolios, which came into effect in April 2024. The review revealed some gaps in how the derivatives were accounted for.

What is the problem with the bank’s internal deal involving foreign currency liabilities?

The problem arose from the currency risk being hedged using derivative instruments. The internal desk used hedge accounting, while the external desk used a mark-to-market approach, leading to discrepancies over time. Premature termination of some deals caused the problem to surface.

Why did the bank only realize the issue now after several years of using the same practices?

The issue accumulated over 7-8 years but remained unnoticed because the amounts involved were small initially. It was only when premature withdrawals occurred in 2023-2024 that the impact became large enough to be noticed.

When did the bank appoint an external agency to investigate the issue?

The external agency was appointed in October 2024 to assess the derivative accounting practices and to help with the transition to a new treasury backend system. The decision was made internally by the bank, not as a result of RBI intervention.

Why did the bank decide to appoint an external agency instead of handling the issue internally?

The bank appointed the external agency because they were unsure about the extent of the issue. The agency was tasked with reviewing the derivative accounting and understanding the processes to ensure compliance with the new treasury system.

What was the estimated loss for the bank due to the accounting discrepancies?

The estimated loss due to the derivative accounting issues is approximately ₹1,500 crores net of taxes, which is about 2.5% of the bank's net worth.

Were there any discrepancies in the reported loss figures from different sources?

Yes, there was a range of estimates from different sources. Some analysts speculated the loss could be as high as ₹2,100 crores, while others calculated it to be between ₹500-600 crores. The correct figure is approximately ₹1,500 crores.

Why didn’t the bank disclose the loss earlier despite appointing an external agency in October?

The bank did not disclose the loss earlier because they were still in the process of fully understanding the scope of the issue. As soon as the bank was confident about the magnitude of the loss, they held a board meeting and made the disclosure.