IndusInd Bank recently reported derivative losses of ₹2,100 crore, leading to a 23% drop in its share price. The bank attributed this loss to a change in RBI rules regarding derivative portfolios, but the issue had been unresolved for some time, allowing losses to accumulate.
Key Factors Behind the Loss
- RBI Rule Change (Sept 2023): Prohibited internal trades/hedging, effective April 1, 2024.
- Derivative Impact: Internal review revealed a 2.35% reduction in net worth, translating to ₹2,100 crore.
- Treasury Operations: Derivatives are used to convert forex deposits/borrowings into rupees.
Understanding Derivatives
- A derivative is a financial contract whose value is linked to an underlying asset. These instruments are used for hedging, speculation, and risk management.
- 4 Main Types of Derivatives:
- Futures Contracts – Standardized contracts to buy/sell at a future date.
- Options Contracts – The right (but not the obligation) to buy/sell an asset.
- Forward Contracts – Custom agreements between two parties for future transactions.
- Swaps – Agreements to exchange financial instruments, often for interest rates or currencies.
- Common Underlying Assets: Stocks, bonds, commodities, currencies, interest rates, and market indexes.
