RBI Tightens Oversight on Derivatives, Treasury Ops of Private and Foreign Banks

Mumbai, June 20, 2025 – The Reserve Bank of India (RBI) has significantly heightened its scrutiny over the derivatives books and treasury operations of private and foreign banks, as part of a broader push to identify and rectify systemic vulnerabilities in India’s financial institutions. The intensification of oversight comes in response to a high-profile accounting discrepancy reported by IndusInd Bank earlier this year, which exposed potential lapses in the handling of foreign currency derivative contracts and hedging practices. With regulators under pressure to reinforce market integrity, the central bank is adopting a more granular approach to auditing legacy trades and ensuring tighter compliance with regulatory norms.

Legacy Derivative Trades Under the Scanner Amid IndusInd Fallout

The RBI’s enhanced supervisory stance is being implemented through an exhaustive review of derivatives portfolios, particularly trades executed between 2018 and 2020. According to people familiar with the matter, the regulator is meticulously examining the structure, accounting, and risk reporting of these trades. Much of the scrutiny has zeroed in on foreign exchange derivative contracts, where hedging decisions and mark-to-market valuations have historically lacked transparency. The move follows revelations from IndusInd Bank, which uncovered a Rs 1,959.8 crore discrepancy in its forex derivatives book—equivalent to a 2.35 percent erosion of its net worth. This triggered widespread concerns regarding internal controls, disclosure norms, and regulatory lapses within the bank’s treasury operations, compelling the RBI to widen its probe.

Highlights:

• RBI reviewing historical derivative trades between 2018 and 2020.

• Triggered by IndusInd Bank’s Rs 1,959.8 crore discrepancy in forex derivatives.

• Concerns over valuation practices, internal controls, and compliance failures.

• RBI focus extends to both private and foreign bank exposures.

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RBI’s Second Round of Derivative Book Reviews in Less Than a Year

This marks the second such intensive probe by the RBI into derivative exposures within a short time frame. Earlier in March 2024, the central bank had initiated a broad-based review of the derivative positions held by private and public sector banks, following indications of accounting inconsistencies. At that time, the RBI had requested extensive internal audits and asked banks to revalidate hedging documentation, exposure limits, and provisioning adequacy. The latest round, however, is described as more forensic in nature, going beyond accounting to inspect trade-level documentation, counterparty exposure assessment, and historical pricing models. The RBI has not issued a public statement on the matter, but a response to media queries is awaited, suggesting regulatory sensitivities remain high.

Highlights:

• Second RBI-led probe in under 12 months focusing on derivatives governance.

• Earlier round in March 2024 led to temporary realignments in treasury norms.

• Current review includes forensic audits and trade-level validation.

• No official RBI statement yet; response to media queries is pending.

SEBI Investigation Reveals Internal Awareness of Discrepancies at IndusInd

According to a detailed interim order by the Securities and Exchange Board of India (SEBI) dated May 27, IndusInd Bank’s senior management had been internally circulating records of discrepancies as early as December 2023, well before its public disclosure in March 2025. Internal emails reveal awareness of fluctuating discrepancy figures, which ranged from Rs 1,572 crore to Rs 2,361 crore over a span of five months. SEBI’s findings suggest that not only was the issue kept from public shareholders, but internal mechanisms failed to escalate the matter to the RBI in real time. The interim order indicates that the bank was first alerted to the misclassification of derivative contracts as early as September 26, 2023, prompting regulatory concerns around delayed disclosure and weak internal compliance culture.

Highlights:

• SEBI interim order shows IndusInd management knew about issues by Sept 2023.

• Internal emails recorded discrepancy amounts ranging up to Rs 2,361 crore.

• Delayed disclosure raised governance and compliance red flags.

• SEBI concluded RBI was not promptly informed despite internal awareness.

Supervisory Tightening In Line With RBI’s Broader Risk Mitigation Framework

The central bank’s actions are in sync with its 2024–25 Annual Report, which emphasized a more proactive, risk-sensitive supervisory framework. In its latest report, the RBI committed to early detection of vulnerabilities and pledged to harmonize supervision across different banking segments. This includes strengthening on-site inspection protocols, increasing the granularity of off-site surveillance, and enforcing discipline across foreign exchange, derivatives, and investment books. Experts say the move reflects growing institutional intent to enhance the systemic resilience of India’s financial markets, particularly as foreign institutional participation deepens and hedging activities become more sophisticated. The episode also underscores the need for robust internal audit functions and real-time regulatory reporting mechanisms.

Highlights:

• RBI’s 2024–25 Annual Report stresses early risk detection and harmonized supervision.

• Enhanced focus on investment, forex, and derivatives portfolios.

• Reinforcement of granular surveillance and stricter inspection standards.

• Reflects broader goal of systemic stability amid complex financial exposures.

Industry Response: Banks Brace for Compliance Reviews and Operational Audits

Following the RBI’s intensification of oversight, private and foreign banks are preparing for comprehensive operational audits and regulatory inquiries. Many treasury departments are reviewing their internal control frameworks, with some banks reportedly appointing third-party audit firms to conduct pre-emptive stress testing and compliance checks. Several institutions have also begun retroactive reconciliations of their derivatives positions, anticipating potential show-cause notices or corrective action mandates. While banks have thus far refrained from public comment, industry insiders suggest that the RBI’s inspections could result in new compliance benchmarks, particularly in documentation standards, valuation methodology, and disclosures under the derivatives master direction.

Highlights:

• Private and foreign banks preparing for audit scrutiny and RBI inquiries.

• Internal reviews underway to strengthen controls over derivatives trading.

• Banks hiring external consultants for pre-emptive risk audits.

• Possible introduction of new compliance standards across the sector.