In IndusInd Bank's case, the accounting practice in question went unchallenged for years, according to management. Among other things, it had enabled certain internal derivatives trades to continue even after the RBI disallowed them a year ago.
Not only did the bank not unwind those trades immediately, but some portions of the derivatives transactions were not appropriately marked to market, management disclosed.
The bank has not said whether the accounting practices were cleared by the bank's board or if the board's risk and audit committees were aware of the discrepancies before they were finally disclosed publicly.
But Ashok Hinduja, Chairman of IndusInd International Holdings – the bank's largest shareholder - told business news channel CNBC TV-18 that they were unaware.
"The discrepancy in the accounting shows weakness in the bank's risk management, compliance and reporting and persistent weaknesses in these areas could weaken IndusInd's reputation, and hence its funding and liquidity," Moody's Ratings said in a note dated March 17. It put the bank's rating on review for a possible downgrade.
For the Reserve Bank of India, which is both the central bank and the banking regulator of the world's fifth-largest economy, stronger governance at banks and particularly bank boards has been a long-standing quest.
Former RBI Governor Shaktikanta Das spoke of it often and in a speech in November 2024 urged bank boards to "remain vigilant to operational risks" and to ensure that functions such as compliance, risk management and internal audit remained sufficiently independent of management pressures.
"A well-functioning board of directors with proactive oversight of governance" is what sets a resilient bank apart from an ordinary one, Das said.
Do the disclosures at IndusInd Bank point to risks from inadequate board governance at Indian banks? Write to me with your views at ira.dugal@thomsonreuters.com.
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