“The RBI is examining the derivatives exposures of some private and state-run banks which have large forex derivatives books,” a private sector banker whose bank has been asked to provide details of their exposure told TNIE on Wednesday, asking not be identified.
The central bank has asked the lenders to provide the details of their overseas borrowings, forex deposits as well as their forex hedge positions, the banker cited above said, adding “as of now there is no reason to believe the issue is systemwide. But if the RBI finds any discrepancies, it may ask lenders to go in for an external audit.”
“Now, the RBI wants to make sure that banks with heavy forex liabilities are not exposed to a situation like that of Indusind wherein any loss from internal hedges booked previously are not been accounted for later,” the banker explained.
Under the revised Master Direction of the RBI on ‘Classification, valuation and operation of investment portfolio of commercial banks (directions), 2023’ which came into effect from April 1, 2024, Indusind found it difficult to make the provisions or book the losses, but asked for more time from the regulator. While other banks complied by the June 2024 quarter, Indusind asked for time till September but did not comply. This has forced RBI to first provide for the losses and then inform its investors, which it did this Monday, the banker cited above explained.
According to the master direction, banks have to categorise their derivatives portfolio into three fair value hierarchies—level 1, level 2, and level 3 and disclose it in their financial statements.
On the currency derivative front, the central bank, through a January 5, 2024 circular, said investors must ensure a valid underlying contracted exposure, which has not been hedged using any other derivative contract and that they should be in a position to establish the same if required.