IBSPECIAL

The Hinduja Group-promoted IndusInd Bank is in trouble but has not quite gathered the dirt of Yes Bank when it sank in 2020 due to lending malpractices. 

The  bank’s fault line is currently restricted to discrepancies in forex derivatives accounting, estimated to have an impact of Rs 2,000 crore but could wander beyond after consulting firms PwC and Grant Thornton separately complete their wider audit. The fifth-biggest private sector lender said on 10 March that it estimates the discrepancy to represent approximately 2.35% of its net worth.   

While investigations are going on into whether there was fraud or intentional misstatement of accounts, other cracks have surfaced after the lender's top management disclosed the accounting lapses. This has impacted the lender's deposit flows and share price.

The bank’s deposits from retail and small business customers fell 1.9% to Rs 1,85,180 crore in the March quarter from 1,88,730 crore in the preceding three months, according to provisional data. This indicates withdrawal of Rs 3,550 crore by retail and small business depositors during the March quarter. 

Amid fears of deposit outflows, IndusInd Bank issued certificates of deposits (CDs) securing Rs 16,500 crore in March 2025,  over six times more than compared to Rs 2,500 crore a year ago. 

The private lender's low-cost current and savings account (CASA) ratio also declined to 32.8% as of 31 March 2025, compared to 34.9% in the preceding quarter and 37.9% in the year-ago period. 

The bank’s total deposits grew by only 0.4% sequentially to Rs 4.11 lakh crore as of 31 March 2025, from Rs 4.09 lakh crore a quarter ago. On a year-on-year basis, deposits rose 6.8%, compared to an 11% growth in the December quarter.

Besides the impact on deposits, IndusInd Bank’s share price got butchered. On the day after the disclosure, the lender's stock plunged 31% to close at Rs 655.95 per share on the BSE. On 12 March, the share price further slumped to a 52-week low of  Rs 605.40 and has stayed volatile. Though swinging and climbing, the stock is still below half of its 52-week high of Rs 1,550 on 19 June 2024.  

There are, however, no signs of a fraud yet and it will be wrong to even fear that IndusInd Bank could fall to the extent Yes Bank did. Founded in 2004 by Rana Kapoor and Ashok Kapur as a new-age bank with robust technology, Yes Bank grew fast to become the fourth-largest lender in the private sector but crumbled under the weight of bad loans and allegations of fraudulent divergence. The strategy of loan concentration to a few large corporates such as the Anil Ambani group, Essel group, DHFL and IL&FS initially worked but finally broke the bank. 

Though IndusInd Bank has seen a rise in bad loans in the fiscal third quarter, no big spike is evident. The lender's gross non-performing assets (NPA) inched up to 2.25% in the December quarter from 2.11% in the preceding quarter, while net NPA moved to 0.68% from 0.64%  during the same period. Nothing to be alarmed, really.

In an analyst call after the third-quarter results, IndusInd Bank chief executive officer Sumant Kathpalia said that the vehicle loan book has gone through “a turbulent period” but the “recovery is relatively higher” and it is a “good book” which is “managed in range-bound credit cost”. If anything, the industry is going through a stress in the unsecured business and the microfinance portfolio. 

IndusInd Bank also has the backing of the Hinduja Group, which has businesses spread across banking and finance, trucks, lubricants, information technology, media and infrastructure project development. The original promoters of Yes Bank, on the other hand, were only dependent on the banking business.

Ashok Hinduja, chairman of IndusInd International Holdings Ltd (IIHL), has assured that the promoter group is ready to inject capital into IndusInd Bank, whenever necessary. The bank, however, has not sought fresh fund infusion from the promoters as the capital adequacy is at a comfortable level of over 16% as of end-December 2024, he said. IIHL, the investment arm of Hinduja Group, owns 16% of IndusInd Bank.  

Five days after the private lender revealed the accounting lapses, the Reserve Bank of India (RBI) also reassured depositors not to panic and said the  regulator is monitoring the developments closely. “There has been some speculation relating to IndusInd Bank in certain quarters, perhaps arising from recent events related to the bank. The Reserve Bank would like to state that IndusInd Bank is well-capitalised and the financial position of the bank remains satisfactory,” the central bank said in an official release.

Meanwhile, IndusInd Bank is awaiting the report from PwC, which was tasked to probe into the accounting of the derivatives portfolio and assess the loss soon after the lender discovered discrepancies. The Economic Times reported that PwC has submitted draft findings to the management, but the bank has denied having received it as yet. Soon we will know the findings of PwC, though its scope is limited to conducting an accounting review.  

Later in March, the IndusInd board appointed Grant Thornton to conduct a forensic audit into accounting lapses. The consulting firm has been tasked to identify the bank's mark-to-market derivative losses, detect lapses and fix accountability.

But how did this lapse happen? Like other banks, IndusInd converted its long-term foreign currency deposits into rupees to fund the rising demand for loan growth in India. The interest rate and currency risks were managed through hedging. But where it went wrong could have been in the accounting treatment of the hedging transactions.

The way the operations ran over the last five to seven years is like this. When a dollar-denominated time deposit  maturing in say two years is opened by a non-resident customer, the bank may look at opportunities in India if it does not find a good lending opportunity in dollars. So what it does is convert the dollars to rupees to deploy it in India, with the regulatory condition that the foreign currency exposure is fully hedged.

Since the customer has to be paid in dollars at the end of two years, the dollar-rupee fluctuations creates foreign currency risk, which has to be hedged.

IndusInd Bank’s treasury department took a swap, with the internal derivative desk as the counterparty. The derivative desk, in turn, hedged this exposure with an external market participant. This was accounted for on a mark-to-market basis. 

So the external trade was mark-to-market, while the internal trade was on swap cost accounting or swap valuation. These two legs would vary during the period of contract, but converge on maturity. Discrepancies are caused  when customers opt to withdraw deposits prematurely.

The matter became complex when the RBI barred inter-departmental derivatives trading at banks from April 1 last year. The bank had to stop the internal trade practice and, those prior to that but existing on 1 April, had to be unwound.

The losses began to grow as the rupee weakened and the bank had to repurchase the foreign currency at rates higher than what it had anticipated. In the September-February period, the rupee fell 4.2% against the dollar and 1.6% against the yen.

“We started reviewing our internal trade book. And we observed some discrepancies in accounting of some of the trades, which was identified by September and October 2024. And then we hired the external agency to start reviewing our business. And that is why we are comfortable that by March-end or April early, we should be able to identify the gap,” Kathpalia told analysts. 

IndusInd Bank will surely not crumble but regaining lost ground may take long. Analysts have raised concerns about deposit flows, growth estimates, uncertainty over leadership, fallout of the derivatives accounting issue, findings of the two consulting firms in their reports and net interest margins, given these multiple headwinds.

IndusInd Bank’s slide has come at a time when deposits are hard to mobilise for the banking industry as a whole. The world is also heading towards economic turmoil due to the sweeping tariff proposals of US President Donald Trump.

The challenge for IndusInd Bank is to quickly take remedial action and regain credibility.