Context:
IndusInd Bank has revealed that incorrect accounting of internal derivatives trades, particularly in cases of early terminations, led to notional profits and subsequent accounting discrepancies. This issue was identified in a report from the independent professional firm Grant Thornton, which was appointed by the bank’s board to investigate the root cause of the discrepancies in its derivatives portfolio.
Key Findings and Actions
- Grant Thornton Report:
- The report found that the accounting discrepancies, which resulted in notional profits, have caused an adverse accounting impact on the bank’s profit and loss account.
- The cumulative adverse impact on the bank’s profit and loss account as of March 31, 2025, is estimated to be ₹1,959.98 crore.
- The discrepancies primarily relate to internal derivatives trades, which were incorrectly accounted for during early terminations.
- Internal Review and PwC Report:
- Earlier, on April 15, 2025, the bank disclosed a report from PwC, which was engaged to validate its internal review findings.
- PwC’s assessment estimated a negative impact of ₹1,979 crore on the derivatives portfolio as of June 30, 2024. This was seen as slightly higher than the bank’s internal review, which estimated an impact of ₹1,580 crore.
- PwC’s report indicated that the discrepancies would result in a post-tax negative impact of 2.27% on the bank’s net worth as of December 2024. The net worth of the bank at the end of the December quarter was ₹65,102 crore.
- Board’s Response and Corrective Measures:
- IndusInd Bank’s board is taking steps to assign accountability for the discrepancies, realign roles, and adjust the responsibilities of senior management.
- The bank has already discontinued internal derivatives trades from April 1, 2024, to prevent further discrepancies.
- The bank plans to appropriately reflect the resultant accounting impact in its financial statements for FY 2024-25.
Impact on Financials
- The accounting discrepancies identified in both the internal review and PwC report have a marginally lower impact on the bank’s net worth compared to earlier estimates.
- According to Grant Thornton, the adverse impact of ₹1,959.98 crore is significant but manageable. Brokerages viewed the lower-than-expected impact positively, as the discrepancies were somewhat smaller than initially feared.
IndusInd Bank is working to address the discrepancies in its derivatives portfolio and has already taken corrective actions, such as halting internal derivatives trades. With a clear plan to rectify the accounting errors and strengthen internal controls, the bank aims to mitigate the financial impact, which is reflected in its financial statements for FY 2024-25.
