Sumant Kathpalia and Arun Khurana have left dark clouds hovering over IndusInd Bank, which they led until a forensic investigation report by audit and advisory firm Grant Thornton triggered their sudden exits. 

During their tenures as chief executive officer and deputy CEO, the country's fifth-largest private lender ran multiple accounting lapses which are now suspected to be fraud. This unexpected slide led to the bank’s worst-ever quarter in financial performance and image loss, prompting a net loss of Rs 2,329 crore in the three months through March 2025.

IndusInd Bank has sunk from what was initially perceived as just accounting discrepancies in the derivatives portfolio to a later disclosure that signifies more holes, particularly in the microfinance segment. The lender has said that the board now suspects the “occurrence of fraud against the bank” involving “certain employees” with “significant roles” in  accounting and financial reporting. As a follow-up, the board has directed necessary steps be taken under applicable laws, including reporting to regulatory authorities and investigative agencies, and fixing the accountability of all persons responsible for these lapses.

IndusInd Bank is already under the scanner of market regulator Sebi (Securities and Exchange Board of India) for delayed disclosure of accounting lapses and alleged insider-trading violations while the Reserve Bank of India (RBI)has given 30 June as the deadline date for the bank to submit names for a new CEO. In the interim, a RBI-approved ‘committee of executives’ is overseeing the daily operations of the bank, after deputy CEO Khurana and CEO Kathpalia stepped down on successive days soon after Grant Thornton submitted its report to the bank.

More facts have come to the surface after the bank made its first revelation on 10 March that there was an accounting gap in its derivatives portfolio which would likely have an adverse impact of nearly Rs 2,000 crore. The hit in its profit and loss statement is now estimated at Rs 4,700 crore, including lapses in the bank’s derivatives-related issues and microfinance portfolio. The governance, transparency and accountability of senior executives have come into question. The bank said its board is taking steps to strengthen internal controls, fix accountability of the persons responsible for these lapses and take appropriate action.

In reviews by the bank’s internal audit department (IAD), it has been pointed out that the misclassification of certain microfinance loans has resulted in under-provisioning and non-recognition of non-performing assets (NPAs) aggregating to Rs 1,885 crore; around Rs 760 crore had been incorrectly classified as ‘interest income’ instead of ‘other income’; and there was wrong recording of interest income and fee income of Rs 172.58 crore over the first three quarters of FY2025. On account of derivative-related discrepancies, the internal review showed a hit of Rs 1,960 crore. 

The bank said the IAD in its report, submitted on 8 May, noted that a cumulative amount of Rs 674 crore was incorrectly recorded as interest over three quarters of FY25, which was fully reversed as on 10 January. Also, following receipt of a whistle blower complaint, the IAD reviewed transactions recorded in ‘other assets’ and ‘other liabilities’. It found that there were unsubstantiated balances aggregating to Rs 595 crore in ‘other assets’ accounts of the bank. These were set off against corresponding balances appearing in ‘other liabilities’ accounts in January.

These unfortunate chain of events and the absence of a CEO led to the unusual sight of a part time, non-executive chairman, Sunil Mehta, addressing the investors and analysts. “We acknowledge that the lapses which have happened are not something expected from a bank like us,” he said. “The board and management is committed to take all necessary steps to restore the trust and confidence in the institution. Based on whatever reviews that have been done, all issues have been duly identified, addressed and shared with all the stakeholders. We are starting FY26 on a clean slate without carrying forward any of the past issues.”   

Mehta, who was earlier the chief of state-owned Punjab National Bank, said the search process for the new CEO of IndusInd Bank is at an advanced stage. “The financial impact of all the issues that we have declared has already been undertaken in FY25...The incoming CEO will have the advantage to start with a fresh slate.”

While IndusInd Bank was fighting the storm from inside and it was becoming a little clearer that frauds by employees had a role to play in accounting irregularities, Ashok Hinduja, chairman of the promoter group IndusInd International Holdings Ltd (IIHL), gave assurance that support would be extended to the bank with further capital, if required. He also expressed confidence that the interim management would do a ‘swift’ clean-up.  

Even if the new CEO gets to start with a clean slate, most analysts believe IndusInd Bank’s recovery would be slow and challenging while remedial action would have to be ongoing with focus on a culture of transparency. Internal controls will have to be tightened, governance strengthened and the asset mix likely rebalanced.

Nuvama Institutional Equities expects IndusInd Bank to face a sharp slowdown in earnings growth for next two years. "Every other bank that has gone through accounting discrepancies or prior-period adjustments has taken 3-4 years to achieve a new normal. IndusInd, being a large bank, could take less time. Also, how retail depositors behave in the short term after back-to-back disclosures of prior-period adjustments is unknown," the brokerage firm said in its note.

IndusInd Bank will have to prioritise balance sheet stability versus growth and, according to ICICI Securities, the path to RoA (return n assets) revival remains uncertain. There is also no certainty on how long it will take for the bank to regain its old status. HDFC Securities believes the lender is faced with a severe loss of credibility, which will need years and a complete overhaul to rebuild.  

In a hyper competitive environment, IndusInd Bank’s growth and profitability is likely to slow down in FY26 and the loan growth is expected to stay muted. The deposit growth may also be impacted after these uncertain developments. Brokerage firm Emkay in its note said the new chief will face the “uphill task of resurrecting the bank and regaining the customer and investor trust”.

There are other lenders who are waiting to jump the hierarchy ladder. Federal Bank managing director and CEO KVS Manian has already spoken about his ambition of taking the Kerala-based lender to the fifth spot among the private sector banks in a span of three years, from its current ranking of No. 9. The plan is to expand outside the lender's core territory of Kerala. Yes Bank, rescued by the State Bank of India and a clutch of other banks in 2020, has just got Japan’s Sumitomo Mitsui Banking Corporation (SMBC) to agree to invest Rs 13,482 crore for a 20% stake, making it the largest cross-border merger and acquisition deal in India’s financial sector. The new investor will have major expansion plans for Yes Bank after it completes the stake acquisition.

Despite its troubles, IndusInd Bank can’t be equated with Yes Bank’s wrecked state five years back. The Hinduja-promoted bank’s balance sheet remains healthy after absorbing all the changes with the capital adequacy ratio of 16.24%, provision coverage ratio of 70% and average LCR of 118% with excess liquidity of Rs 39,600 crore, said Mehta. The liquidity remains comfortable in the current June quarter as well with average LCR of 139% in the first half, he added. 

The promoter group's strength has stayed with the bank, with the Hinduja family having interests spread across banking and finance, trucks, lubricants, information technology, media and infrastructure project development. The Reserve Bank of India has also not yet felt the need to appoint a nominee director on the board, as it has done on many occasions in other beleaguered banks.  

IndusInd Bank may not require external financial help, the way Yes Bank or Lakshmi Vilas Bank (LVB) needed the RBI to provide crutches. But suffering a severe jolt, its image and financial health need restoration as it seeks to imbibe more transparency and disband silo structures within the organisation. 

The bank is getting cleaned up under the scrutiny of the RBI and with the help of the promoters. The climb uphill, however, will be challenging amid a tough deposit mobilisation era and a slowing credit growth scenario.