IndusInd Bank has been in deep soup since it disclosed a Rs 1,580 crore discrepancy in its derivatives portfolio, which could hit its net worth by approximately 2.35 per cent as of December 2024. The Bank’s share price too crashed 27 per cent on March 11, hitting the new 52-week low mark.
Given the impact assessment, this leads to uncertainty in context of lower-than-expected tenure extension of MD & CEO Sumant Kathpalia and the exit of CFO Gobind Jain earlier.
While the timing of this event is strange, coming on the heels of the lower tenure extension, there is a lot left unanswered: 1) Why was this not highlighted earlier, 2) How is such a lapse possible despite concurrent audits, 3) Why did the auditors not share any qualifications, 4) Are there any additional challenges, and 5) How did this issue go undetected for more than five years?
Elara Capital said, “This poses a series of questions on lapses in terms of processes and sanctity of book value. Beside the one-year extension of MD & CEO and key management positions, there are likely to be key transitions in the next couple of years, adding to more uncertainty. We expect further stock correction, but the question remains what comes next?”
To put things in context…
This came just days after the Bank had informed that the RBI granted its approval for re-appointment of Sumant Kathpalia as MD & CEO of IndusInd Bank for a further period of one year with effect from March 24, 2025. This was despite the Bank’s board requesting a three-year reappointment.
Barely three days after its CEO got a shorter extension from the RBI, IndusInd Bank, on Monday, said that an internal review of its derivative portfolio revealed discrepancies, which could hit its net worth by approximately 2.35 per cent as of December 2024. The private sector lender’s net worth as of December 31 stood at Rs 65,102 crore and the impact is likely to be around Rs 1,530 crore which is more than Rs 1,401.3 crore net profit record in the third quarter of FY25.
The Bank has, in parallel, appointed a reputed external agency to independently review and validate the internal findings. In the exchange filing, it said, “A final report of the external agency is awaited and basis which the Bank will appropriately consider any resultant impact in its financial statements.” IndusInd Bank further maintained that its profitability and capital adequacy remain healthy enough to absorb this one-time impact.
Before the letter exposing discrepancies was released on the exchanges, CEO Sumant Kathpalia had acknowledged that the RBI was aware of the derivatives issue before granting him a shorter-than-expected one-year tenure extension. In an investor call, he said, “I think the RBI is uncomfortable with my leadership skills in running the bank, and we have to respect that.” Now, the board has been tasked with evaluating both internal and external candidates for the CEO position.
What really happened?
IndusInd Bank internally hedged forex borrowers by entering internal derivative contracts with its trading desk. Elara Capital summarised, “The trading desk then hedged this exposure externally in the market. External trade was marked to the market, meaning its value fluctuated with market rates, negatively affecting P&L. The internal trade was accounted for using swap cost accounting or swap valuation, affecting asset book instead of P&L. External trades moved with the market, but internal ones followed swap valuation, which might not reflect market movements. This mismatch could temporarily bolster reported NII while suppressing actual trading losses. But the external hedge was MTM, and this created a mismatch in income recognition. Over time, if internal trade diverged significantly from external market movements, the real impact surfaced when the trade was unwound or matured.”
Let’s take a look at timeline of events…
The past few years have been challenging for IndusInd Bank. In May 2021, a technical glitch at its microfinance subsidiary, BFIL, led to 84,000 loans being disbursed without recorded customer consent.
More recently, in January 2025, CFO Gobind Jain resigned, just before Q3 earnings, while on March 7, RBI approved CEO Sumant Kathpalia’s tenure for only one year instead of three. And the latest discrepancy revelation has only added to governance concerns, raising questions about compliance.
Promoter support intact
Meanwhile, Ashok Hinduja, Chairman of IndusInd International Holdings, played down the derivative discrepancies issues and called it “normal” and “routine”. He went on to add that he expects the problem to be resolved and reiterated full promoter support to the Bank management and the board. He even assured that the bank remains financially strong with an operating profit of Rs 11,000 crore in nine months.
Snapshot of Q3 performance
IndusInd Bank had, in January, released its fiscal third quarter earnings report with profit at Rs 1,402.3 crore, down 39 per cent YoY from Rs 2,301 crore in the same quarter last year. Net interest income (NII), meanwhile, fell 1.3 per cent to Rs 5,228.1 crore from Rs 5,295.6 crore a year ago.