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The Reserve Bank of India (RBI) is now assessing whether lapses linked to unhedged forex liabilities are restricted only to the embattled IndusInd Bank, currently facing what its chief executive called a litmus test, or are symptomatic of a broader malaise in the country's banking system, people aware of the matter told ET.
To assess the extent of the problem, the RBI has contacted several large banks to verify their hedging effectiveness and positions in the forex derivative market, said the people cited above. The RBI has asked these banks to provide details about their foreign currency liabilities, including FCBR (B) deposits and foreign currency-denominated bonds.
The RBI also directed the lenders to clarify whether these positions are hedged. If they are not hedged, banks have been asked to explain why, according to the sources.
To be sure, banks typically do not hedge the portion of foreign currency liabilities held by their overseas offices.
Hedging Strategies
The RBI has also inquired from the lenders whether they are testing the efficacy of their hedging strategies for foreign currency liabilities on a quarterly basis, said the sources cited above. It has also sought assurances from banks that they are fully adhering to the hedging guidelines--in both letter and spirit.
The RBI did not respond to e-mailed request for a comment.
IndusInd Bank disclosed on Monday that it has launched an internal review of a portion of its derivative portfolio after discovering discrepancies in account balances. The bank estimates these discrepancies could result in a financial impact of approximately 2.35% of its net worth, with analysts projecting a potential resultant loss of nearly ₹1,600 crore in the March quarter.
Stock Sinks
The IndusInd stock has been roiled over the past six months, with unexpected provisioning causing a significant decline in its third-quarter net profit. The Hinduja-promoted lender, which has lost more than 50% in the past six months, lost an unprecedented 27% Tuesday after the management disclosed the accounting discrepancies running across multiple years.
The issues stemmed from internal trades involving low-liquidity instruments, such as 3 to 6-year yen and 8 to 10-year dollar borrowings.
Rather than directly hedging foreign currency borrowings and deposits with external counterparties, the bank used its internal desk for the hedging process.While external trades were marked to market, the internal trades were valued using swap valuations.
As a result, the two legs of the trade could fluctuate over the contract period but typically converge at maturity.
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