NUMBERS DON'T LIE - UNTIL THEY DO (The IndusInd Bank Scandal)


When did the matter came in news about IndusInd Bank and why it is highlighted in 2025?

The discrepancies were detected between September and October 2024, following the Reserve Bank of India’s (RBI) revised guidelines on derivatives. However, the bank officially disclosed the issue in an exchange filing on March 10, 2025, following a board meeting. The news about IndusInd Bank's accounting discrepancies emerged on March 11, 2025, when the bank disclosed an internal review revealing a discrepancy of approximately 2.35% of its net worth. This was followed by a sharp decline in the bank's share price. The disclosure led to a significant crash in the bank's share price, with a drop of over 27% in a single day. 

It is highlighted because as when you're dealing with derivatives, their value changes based on the price of the asset they're linked to—like a currency, stock, or interest rate. You might come across types like forwards, options, or swaps.

In IndusInd Bank’s case, imagine you're using derivatives to manage the risk of holding foreign currency deposits or loans, by converting them into Indian rupees. Now, suppose your internal team reviews the books and finds that similar trades have been recorded in different ways. This kind of inconsistency becomes a problem—especially when you're trying to follow the updated rules set by the Reserve Bank of India (RBI). That’s exactly what happened with IndusInd—they noticed the discrepancies during their effort to comply with the new RBI regulations.



How did it affect the stock market?

The reason was a discrepancy that is estimated to cost the bank around ₹1,580 crore (post-tax), which would affect the bank’s net worth of ₹65,102 crore by 2.35%. Adding to an already pressured market is the news that IndusInd Bank stock crashed nearly 27%. This level is the lowest it has been since November of 2020.After the issues in derivates the investors confidence has reduce on the bank in single day it lost around Rs.19,000 crores.

There is still room for optimism. If the bank shows better financial performance particularly by improving the quality of its microfinance loan portfolio then current concerns may begin to ease. Moreover, if deposit growth picks up and the bank maintains enough liquidity to support its expansion plans, investors might view the recent issue as a minor error rather than a significant setback.

External Audit

During the June 30,2024 while conducting internal audit they found discrepancies in derivatives according to the RBI rules and regulations. Following this, the bank engaged PricewaterhouseCoopers (PwC) to perform an external validation of the derivative positions and accounting methodologies, helping to quantify the financial impact of the lapse, PwC found difference around Rs.1979 crores. Subsequently, in early 2025, you would find that Ernst & Young (EY) was brought in to carry out an independent external review. Their focus was to evaluate the bank’s internal control systems, governance mechanisms, and the overall extent of procedural lapses. If you were analyzing the situation, this review would give you deeper insight into the systemic weaknesses that existed within IndusInd Bank’s operations, beyond just the surface-level accounting issues.

 On March 15, 2025, IndusInd Bank’s statutory auditors—MP Chital & Co. and MSKA & Associates (a member of the BDO network)—formally recommended a forensic audit.

For, first Forensic Audit the IndusInd Bank appointed Grant Thornton Bharat (GTB). Through this review we got to know that these discrepancies has persisted from past 5-7 years. The audit found that IndusInd Bank’s treasury team had made trades using foreign currencies like yen and dollars, which were not easy to sell quickly (low in liquidity). These trades were not valued at current market prices, as they should have been. Because of this, the bank showed more profit than it actually earned and did not report the real risk of losses in its books.

The second Forensic Audit was conducted by Enrst&Young (EY) during April 2025. The second forensic audit of IndusInd Bank revealed irregularities involving the misreporting of financial statements and potential violations of internal controls. It pointed out concerns about improper loan classifications and non-disclosure of certain financial risks, which could have impacted the bank's financial health. The audit suggested that these issues were not properly addressed in previous reports.



REPLACEMENT OF CEO

RBI has suggested IndusInd Bank CEO, Sumant Kathpalia. But, IndusInd Bank initially denied reports that the CEO, Sumant Kathpalia, would be replaced after some accounting issues were discovered. However, even though the bank's board wanted to reappoint him for three more years, the Reserve Bank of India (RBI) only approved his reappointment for one year.

This raised concerns about the bank's internal management and governance because it seemed like the RBI was not fully satisfied with how things were being run. The short one-year extension, instead of the expected three-year term, made people worry about the bank’s leadership in the future. This could eventually lead to a change in the CEO position.

“We would like to clarify that the recent media reports regarding the tenure of the Bank’s CEO and Deputy CEO are factually incorrect," the bank said.

There are questions being raised about how the bank could have missed this large an amount in its regular audits. Questions are also being raised about why MD & CEO Sumant Kathpalia and Deputy CEO Arun Khurana sold nearly 80% of their shareholding in the market months before this gap was revealed to the public.



CHALLENGES FACED BY INDUSIND BANK CURRENTLY

  1. Big Loss from Derivatives Trading:                                                                                        The bank has reported a major financial loss of ₹1,979 crore due to mistakes in how it accounted for certain derivative trades. These trades were linked to Non-Resident External (NRE) deposits. As a result, the bank's net worth could fall by 2.27% by December 2024. To understand what went wrong and who is responsible, a forensic audit is being conducted by the firm Grant Thornton. This has raised serious questions about how the bank manages and records complex financial instruments.
  2. Poor Internal Controls and Risk Management:                                                           These losses have revealed serious weaknesses in the bank's internal control systems and risk management processes. It appears that internal audits either failed to catch or ignored warning signs. This has made the Reserve Bank of India (RBI) question whether the bank is capable of properly managing its risks, especially when dealing with complex financial products like derivatives.
  3. Investor Confidence Takes a Hit:                                                                                           Following the news of the losses and internal issues, the bank’s stock price has dropped. Investors are losing confidence, and several financial analysts have downgraded their outlook on the bank’s shares. There are concerns about the bank’s financial stability and corporate governance. As a result, the bank may face challenges in gaining investor trust and achieving future growth.
  4. Increased Regulatory Scrutiny and Possible Penalties:                                                    The RBI is closely monitoring the situation and has started its own investigation. It may impose financial penalties or other corrective measures against the bank. This is not the first time the bank has faced action—there have been earlier fines for compliance-related lapses as well. The current case could lead to even stricter regulatory oversight.
  5. Leadership Uncertainty and Governance Issues:                                                               Due to the severity of the situation, the RBI has cut short the tenure of the bank’s CEO, Sumant Kathpalia. This sudden decision has raised concerns about leadership succession and the overall governance structure of the bank. The bank's board is now required to recommend a list of potential candidates for the CEO role by September or October 2025. Ensuring a strong and trustworthy leadership will be key to the bank's recovery.

How IndusInd Bank is Trying to Recover and Win Back Investors

  • IndusInd Bank has appointed Grant Thornton to do a forensic audit and find out how the ₹1,979 crore loss happened.
  • The audit will help identify what went wrong and who is responsible.
  • The bank is working on improving its internal systems and controls to avoid such mistakes in the future.
  • It is cooperating fully with the Reserve Bank of India (RBI) and following all of its instructions.
  • After the RBI shortened the CEO’s term, the bank is preparing to suggest new CEO candidates by September or October 2025.
  • The bank plans to communicate more clearly with investors to regain their trust.