MUMBAI: IndusInd Bank may witness a second wave of retrenchments as a forensic audit into derivative accounting lapses reveals the involvement of 25 treasury staffers — a finding that has rattled the upper echelons of the bank’s management, according to people familiar with the matter.
In the meantime, IndusInd Bank shares dropped during Thursday’s trading after CRISIL assigned ‘Watch Negative’ to the IndusInd Bank’s debt instruments.
IndusInd Bank’s shares dropped more than 2 per cent as Crisil Ratings placed its long-term debt instruments under ‘Rating Watch with Negative Implications’.
“The bank’s deposits remained stable, but challenges in microfinance and managerial changes raise concerns,” CRISIL noted.
GT audit
The Grant Thornton audit comes in the wake of disclosures by the bank’s former top brass about long-running irregularities in the treatment of derivative instruments – a strategy that reportedly revolved around unhedged Japanese yen contracts used to artificially suppress the bank’s cost of funds.
Sources say while not all of the 25 identified employees may be shown the door, many are expected to exit in the coming weeks.
Staff members who are found to have flagged the accounting irregularities internally – and left a communication trail indicating that the senior management was made aware of the possible fallout – may be reassigned to other departments instead of being let go.
At least half of the individuals named in the Grant Thornton report are expected to be retained, a person familiar with the matter said.
Yen-denominated forex derivative
The IndusInd Bank lapses reportedly centre on yen-denominated foreign currency derivative contracts that were kept unhedged – a tactic that allowed the bank to benefit from lower borrowing costs in the short term.
By not accounting for potential currency fluctuations appropriately, the bank’s books may have understated liabilities or risks tied to these exposures, effectively misrepresenting the true cost of funding.
“The impact was likely buried under the rug to avoid volatility in quarterly earnings,” a source said. “But over a period of seven years, these risks added up.”
Among the 25 employees named in the audit are several senior executives, including the head of treasury and multiple others across various rungs in the department. The report has also flagged former MD & CEO Sumant Kathpalia and former deputy CEO Arun Khurana, who oversaw the bank’s global trade division.
On March 10, Kathpalia, during an investor call, acknowledged the accounting lapses but did not offer specifics. Since then, the forensic audit has expanded to cover treasury operations and internal controls.
While corrective measures are underway, including a revamp of internal processes and oversight mechanisms, people aware of the developments say the full extent of the lapses and their impact on financials are still being evaluated.
