IndusInd Bank, India’s fifth-largest private sector lender, is experiencing a turbulent period marked by huge financial gaps and leadership uncertainties. The recent revelation of a huge accounting gap in its derivatives book not only jolted investor confidence but also placed the bank’s internal controls and governance processes under the limelight.
Unveiling the Derivatives Discrepancy
During the first week of March 2025, IndusInd Bank reported mismatches in its foreign currency derivative transactions spanning seven to eight years. This internal audit identified an accounting mismatch of approximately ₹1,520 crore after tax (approximately $184 million) or approximately 2.35% of the bank’s net worth as of December 2024. This was a result of the bank’s practice to conduct internal derivative transactions for low-liquidity instruments, rather than hedging in external counterparties.
These instruments were three-to-six-year borrows of yen and eight-to-ten-year borrows of dollars. While the external trades were marked to market value, the internal trades were on the basis of swap valuations, leading to financial reporting mismatches. Over a period, as the two legs of the trade shifted, the mismatches increased, leading to the current financial impact. Market Reaction and Financial Implications
The accounting mismatch news jolted the market.
IndusInd Bank stocks dipped over 27% on March 11, 2025, its largest one-session drop since March 2020, dragging the stock to a four-year low. The sharp drop is a reflection of investor apprehension regarding the bank’s internal controls and long-term impact on its financial well-being. The internal controls of the bank have been questioned by analysts and they anticipate a significant impact on the 2024-25 earnings, with potential derating of the stock. Regulatory Scrutiny and Sector-Wide Implications
The Reserve Bank of India (RBI) has noted this incidence by expanding its investigation into the derivative exposures of a number of private and public sector banks. The central bank requested various lenders to provide detailed information about their foreign borrowings, deposits, and foreign exchange hedge positions. This industry-wide examination is meant to ensure that no such discrepancy exists elsewhere, giving evidence of the larger impact of IndusInd Bank’s accounting lapse on India’s banking system.
Leadership in the Limelight
While the nation is being plagued by financial crises, leadership at IndusInd Bank has also come under some scrutiny.
RBI granted only a one-year extension to Managing Director and CEO Sumant Kathpalia, falling short of the three-year term as recommended by the board of the bank.
Kathpalia had acknowledged that RBI’s move might be due to criticism leveled against his leadership, especially in the wake of recent mismatches. He explained, “I believe it is uncomfortable with my leadership skills in running the bank, and we have to respect that.” This revelation creates worry about the bank’s succession planning as well as its governance within, adding yet another uncertain element to its future trajectory.
Steps Towards Solution As a response to the crisis, IndusInd Bank has made some reforms. Since April 1, 2024, the bank has transferred all its internal derivative trades and no longer has any unhedged positions. It has shifted to hedging foreign currency borrowings only via external counterparty. In a bid to be transparent and restore stakeholder confidence, the bank has engaged an external agency to conduct an independent audit and informed the RBI formally about the same.
Looking Ahead
The failures of IndusInd Bank are a harsh mirror of the tall price to be paid for having effective internal controls, clean book-keeping practices, and good leadership in the banking sector. When the bank acts to rectify these failures, the regulators, investors, and its industry competitors would be keenly watching its moves. The coming months will be crucial to judge how IndusInd Bank would navigate this crisis and regain the trust of its stakeholders.
To put things into better perspective, here’s an exclusive interview with IndusInd Bank CEO Sumant Kathpalia, in which he discusses the gaps and how the bank has responded:
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