IndusInd Bank Faces Rs 1,979 Crore Hit From Derivative Discrepancies
External Audit Reveals Significant Impact on Bank's Net Worth Amid Ongoing Review
MUMBAI: IndusInd Bank has announced a substantial setback following the release of an external audit report by PwC, which identified discrepancies in the bank's derivatives portfolio. The report, disclosed on April 16, 2025, quantified the negative impact on the bank's net worth at Rs 1,979 crore, translating to a 2.27% reduction as of December 2024.
This revelation comes on the heels of the bank's earlier admission on March 10, 2025, when it estimated an adverse impact of approximately 2.35% of its net worth due to similar discrepancies. The ongoing review, which is being conducted by an external agency, aims to provide a thorough assessment of the internal findings and ensure transparency in the bank's financial reporting.
According to the bank's filing with the stock exchanges, "The bank will appropriately reflect the resultant impact in the financial statements for FY 2024-25 and continue to take suitable steps to augment the internal controls relating to the derivative accounting operations of the bank." This commitment to address the issues highlights the bank's proactive approach in managing its financial integrity.
IndusInd Bank's troubles began when it identified discrepancies in the account balances of its derivatives portfolio, which were initially reported during an internal review. This internal assessment noted that losses on forex derivatives and swap transactions executed prior to April 2024 were not recognized through net interest income (NII), while corresponding treasury gains were recognized in the profit and loss statement. Such accounting practices raised eyebrows and suggested a potential breach of accounting norms.
The Reserve Bank of India (RBI) had issued directives in September 2023 prohibiting banks from conducting internal trades or hedging, prompting IndusInd Bank to cease such activities starting April 1, 2024. Despite these measures, the bank's internal review revealed that certain transactions were not fully unwound daily, leading to the accumulation of losses over time.
Market reactions to the news have been significant. Following the initial disclosure of derivative losses, IndusInd Bank's stock price plummeted by as much as 27%, wiping out over Rs 19,000 crore from its market capitalization. However, the stock showed signs of recovery, closing at Rs 735.50 on the NSE on the previous trading day, a rise of Rs 46 or 6.7%. This rebound is notable, especially considering the stock had previously hit a 52-week low of Rs 606 on March 12, 2025.
In a bid to reassure investors and customers, the RBI stated on March 15, 2025, that IndusInd Bank remains financially stable and well-capitalized, countering speculative reports that may have caused concern among depositors. The central bank emphasized that there was no cause for alarm regarding the bank's financial health.
As IndusInd Bank navigates through these turbulent waters, it is also facing scrutiny regarding its leadership. On March 7, 2025, the RBI granted CEO Sumant Kathpalia a one-year extension, a decision that was notably shorter than the board's request for a three-year term. This decision reflects the RBI's cautious approach in overseeing the bank's management during this challenging period.
In terms of financial performance, IndusInd Bank reported a Capital Adequacy Ratio of 16.46% and a Provision Coverage Ratio of 70.20% for the quarter ending December 31, 2024. Additionally, the bank maintained a Liquidity Coverage Ratio (LCR) of 113% as of March 9, 2025, exceeding the regulatory requirement of 100%.
Looking ahead, analysts have projected a challenging quarter for IndusInd Bank. IIFL Securities anticipates a net loss of Rs 280 crore for the March quarter, a stark contrast to the net profit of Rs 2,349 crore reported during the same period last year. The brokerage also predicts a decline in deposits, attributing this to the recently reported accounting discrepancies.
Net Interest Income (NII) is expected to decrease by 7% year-on-year (YoY) to Rs 5,000 crore, down from Rs 5,376 crore in the corresponding quarter of the previous year. Furthermore, non-interest income is projected to decline by 13% YoY to Rs 2,170 crore, indicating a challenging financial landscape for the bank.
As the situation develops, IndusInd Bank remains committed to enhancing its internal controls and ensuring the accuracy of its derivative accounting operations. The bank's management is focused on implementing corrective measures to restore confidence among stakeholders and maintain its position in the competitive banking sector.
In summary, the external audit report has unveiled significant discrepancies in IndusInd Bank's derivatives portfolio, leading to a notable hit to its net worth. The bank's proactive measures and the RBI's assurances of stability will be crucial as it works to navigate these challenges and regain the trust of its investors and customers.
