For the fifth straight day, shares of IndusInd Bank Ltd tanked 27% on Tuesday after the private sector lender reported some discrepancies in its derivatives portfolio. During the morning trade, IndusInd Bank slumped 22.8% to hit the lower circuit at Rs695.25, a 52-week low of the scrip on BSE. On Tuesday, the scrip plummeted 27.06% at Rs655.95 on BSE, while the 30-share Sensex ended the day flat at 74,102.32 points.
IndusInd Bank, one of India's private sector banks, has revealed that discrepancies within its derivative portfolio will likely lead to a 2.35% reduction in its net worth, equivalent to approximately Rs1,529 crore, as of December 2024. The announcement, made on 10 March 2025, raised concerns among investors and analysts, who are closely watching the developments.
The discrepancies were found in the Bank's 'other asset and other liability' accounts, which typically involve complex financial instruments like options, swaps, and forwards. These instruments are used for hedging or speculation but require meticulous accounting and valuation. The internal review flagged errors that likely resulted in misclassifications or inaccurate valuations of these positions, leading to the expected financial hit.
As of December 2024, IndusInd Bank's net worth stood at Rs65,102 crore, meaning that a 2.35% reduction would impact its financial position by Rs1,529 crore. While this amount is considerable, it represents a relatively small portion of the Bank's overall net worth. However, it could still have significant implications for its capital adequacy and lending capacity, especially in the context of regulatory guidelines set by the Reserve Bank of India (RBI).
Another cloud of uncertainty emerged over the leadership following RBI's decision to extend the prevailing chief executive officer (CEO) Sumant Kathpalia's term to one year against three years that the private lender sought. During an analyst call on 10 March 2025 regarding concerns over discrepancies found in the Bank's internal account review, the CEO acknowledged that the RBI was aware of the issue, to some extent.
He admitted uncertainty about the rationale behind receiving a one-year extension but suggested that RBI might have concerns about his leadership in managing the Bank. He emphasised the need to respect the decision and viewed the situation as a critical test for the Bank's leadership succession.
Mr Kathpalia assured that the Bank's regular operations and growth strategy would remain unaffected and reiterated his commitment to the institution for the next year. He mentioned that the board would consider both internal and external candidates for the CEO position.
He also explained that the Bank began reviewing its derivatives book after RBI issued its circular in September 2023 on the classification, valuation, and operation of investment portfolios. From 1 April 2024, internal trades had to be discontinued which led to the discovery of discrepancies. Despite this, he reassured that the Bank's profitability and capital adequacy remained strong enough to absorb the one-time impact.
In response to the findings, IndusInd Bank has engaged an external agency to review the discrepancies independently. The Bank emphasised that the final report, which is still awaited, will determine the full extent of the impact. This independent validation is seen as a critical step in ensuring transparency and compliance with RBI's enhanced regulatory standards which came into effect in April 2024. RBI's new guidelines, issued in 2023, require banks to adopt more stringent practices in managing and reporting derivative positions.
The market's reaction to the news was immediate, with stock crashing more than 20% on 11 March 2025, wiping off over Rs14,000 crore in market value and the stock has fallen over 50% from September 2024. The sharp drop in stock price reflects investor apprehension over the potential financial implications of the accounting discrepancies and uncertainty surrounding the final outcome of the external review. Such discrepancies in the derivative portfolio can raise questions about the Bank's overall financial health and risk management practices, triggering market volatility.
Despite the setback, IndusInd Bank reassured investors that its profitability and capital adequacy remain strong enough to absorb the one-time impact. The Bank's capital adequacy ratio (CRAR) stood at 16.46% as of Q3FY24-25, well above RBI's minimum requirement of 11.5%.
The Bank emphasised that the discrepancies would not have a lasting impact on its overall financial stability, and it would adjust its financial statements based on the final report from the external agency.
This situation occurs against the backdrop of RBI's push for enhanced governance in the banking sector, particularly regarding derivative portfolios. RBI's increased scrutiny of financial instruments like derivatives is part of a broader effort to deepen India's financial markets and reduce systemic risks. While the new regulations are intended to strengthen the banking sector in the long term, they also expose banks to greater scrutiny which could lead to the discovery of similar discrepancies at other financial institutions.
The impact of this revelation extends beyond IndusInd Bank. Given the size and importance of the private sector bank in India's financial ecosystem, the situation has prompted discussions on the broader implications for the sector. If other banks face similar issues, it could lead to widespread reviews and potentially affect market confidence in the banking system as a whole. Moreover, the regulatory environment will likely evolve as RBI continues enforcing stricter accounting standards for derivative portfolios.
