Context:
RBI is assessing whether lapses in unhedged forex liabilities extend beyond IndusInd Bank to the broader banking system.
- Banks asked to provide details on:
- Foreign currency liabilities (including FCBR(B) deposits and foreign currency bonds).
- Hedging effectiveness and positions in forex derivative markets.
- Quarterly testing of hedging strategies for compliance.
- Regulator seeks assurances that banks adhere to hedging guidelines in both letter and spirit.
IndusInd Bank’s Net Worth Erosion
- Internal review uncovered discrepancies in derivative portfolio, potentially impacting 2.35% of net worth (~₹1,600 crore loss in Q4 FY24).
- Issues stemmed from internal trades using low-liquidity forex instruments:
- 3 to 6-year yen borrowings and 8 to 10-year dollar borrowings.
- Instead of hedging directly with external counterparties, the bank used internal desks.
- Discrepancies arose due to differences between swap valuations and mark-to-market pricing.
- Review triggered by an RBI circular (Sept 2023), prompting scrutiny of derivative practices.
Potential Industry-Wide Implications
- If systemic gaps are found, RBI may tighten forex hedging regulations.
- Greater scrutiny on risk management practices in banks’ derivative portfolios.
- Banks may face higher compliance costs and stricter monitoring.
RBI’s investigation could uncover systemic risks related to unhedged forex liabilities. IndusInd Bank’s case highlights risks of internal hedging mechanisms without external counterparties. Tighter oversight and possible regulatory interventions could reshape forex risk management practices in the banking sector.
