The absence of an external auditor doing a concurrent audit on IndusInd Bank’s marked to market (MTM) derivative losses has hit the bank hard, putting the spotlight on resultant vulnerability from an evident process gap that might not be limited to the private lender alone.
In IndusInd Bank’s case, although the treasury transactions faced an internal scrutiny, there was no external examination of the trading transactions. An external scrutiny could have exposed the bank’s treasury to questions on its hedging positions, bankers and analysts said.
“Concurrent audit, if done, would have flagged risks on MTM losses to the bank and brought it into focus,” said a risk management consultant at one of the big four firms. “This was, perhaps, the biggest gap in the bank’s processes because this large MTM loss was probably ignored, despite the rupee having changed course.
IndusInd Bank did not respond to ET’s mailed query for a comment.
Concurrent audits are real-time parallel checks done mostly by external auditors. Every transaction is audited thoroughly rather than a sample check, shortening the recovery timeline in case of an anomaly or a loss.
IndusInd Bank’s initial estimates of the loss come to about Rs 1,600 crore – about 2.35% of its net worth.
Former banker and treasury veteran Manoj Rane, who was a part of the founding team at IndusInd, raised some important questions in a LinkedIn post on Saturday.
Control Segregation
He pointed out that the asset liability management (ALM) and trading business at the bank were not separated and they reported to the same person. Also, if the hedges were indeed appropriate, there was no question of this loss suddenly being realized or arising due to a change in Reserve Bank of India (RBI) guidelines.
“Once hedged internally with the trading book, the loss would still hit IndusInd, only if the trading book did not hedge the trades externally or suppressed / failed to disclose or account for the losses in the trading book,” Rane wrote in his post.
He questioned how the bank’s heads of market risk, global markets, CFO and auditors missed such a big hole.
Analysts said any sharp uptick from the estimated numbers so far could deepen the crisis of trust the bank is going through.
“While the reported loss, though sizable, is unlikely to materially impact the bank’s capital position, the broader conce
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