IndusInd Bank in Turmoil: Derivative Debacle Triggers 30% Stock Crash and Governance Crisis
IndusInd Bank, one of India’s leading private lenders, recently faced a severe crisis that sent its stock tumbling by nearly 30% in a matter of days. The dramatic decline was sparked by the discovery of discrepancies in the bank’s derivative portfolio, raising alarming questions about its financial health, internal controls, and governance practices. Here’s a detailed look at the issue and its far-reaching implications.
The crisis originated from an internal review of the bank’s derivative portfolio, particularly its foreign exchange (forex) derivative transactions conducted over the past 5-7 years, prior to April 2024. These transactions, primarily internal trades used to hedge foreign currency borrowings and deposits, were managed by the bank’s treasury and asset-liability management desks. Historically, the bank accounted for these trades in a manner that inflated its reported net interest income (NII) by masking trading losses. However, this accounting approach did not reflect market realities, as losses were not fully recognized when the trades matured or were unwound.
The issue came to light following new regulatory guidelines issued by the Reserve Bank of India (RBI) in September 2023 under the *"Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks."* Effective from April 1, 2024, these rules prohibited banks from conducting internal derivative trades for hedging purposes and imposed stricter accounting standards. When IndusInd Bank reviewed its "Other Asset and Other Liability" accounts in compliance with these guidelines, it uncovered significant discrepancies. The bank’s internal committee estimated a pre-tax loss of Rs 2,100 crore (approximately $250 million), translating to a post-tax hit of Rs 1,580 crore (around $190 million). This amounted to a 2.35% reduction in the bank’s net worth, which stood at Rs 65,102 crore as of December 2024.
The financial impact was substantial, but the crisis was exacerbated by broader concerns. The bank announced that it would absorb the loss through its profit and loss (P&L) statement, likely in the fourth quarter of FY25 (January-March 2025) or the first quarter of FY26. This, combined with existing stress in its microfinance (MFI) portfolio and higher provisions, was expected to push the bank into a quarterly loss, further eroding investor confidence. Analysts pointed out that the discrepancies highlighted weaknesses in internal controls and risk management, as such a significant mismatch had gone unnoticed for years.
The timing of the revelation intensified the fallout. Just before the disclosure, the bank’s Chief Financial Officer (CFO) resigned in January 2025, and on March 7, 2025, the RBI approved only a one-year extension for CEO Sumant Kathpalia, instead of the customary three years, signaling potential regulatory concerns. These developments, coupled with the derivative issue, painted a picture of instability. When the bank disclosed the problem to shareholders on March 10, 2025, the stock plummeted. On March 11, it crashed by as much as 27-30% intraday, hitting a 52-week low of Rs 649-657 on the BSE and NSE, wiping out over Rs 18,000 crore in market capitalization.
Brokerages reacted swiftly, downgrading the stock and slashing target prices by up to 30%. Firms like Kotak Institutional Equities and Nuvama Institutional Equities emphasized a loss of trust, noting that the derivatives issue was more unsettling than typical bad loan disclosures due to its implications for governance and credibility. The bank appointed an external auditor to validate its findings, with a final report expected by late March or April 2025, but the uncertainty kept investors on edge.
In summary, the IndusInd Bank derivative portfolio crisis stemmed from years of improper accounting of forex hedges, exposed by new RBI rules, resulting in a Rs 1,580 crore post-tax hit to its net worth. The stock crashed around 30% due to this financial blow, compounded by leadership uncertainties and broader credibility concerns, marking one of the bank’s worst crises in recent history. While the bank claims its capital adequacy remains sufficient to absorb the loss, the road to rebuilding trust and stabilizing its stock price will likely be challenging.
Anish J Parashar
Indirect tax india.in
Disclaimer :Content above reflect personal views of the author. For trading and suggest purposes consult your financial advisor.
