IndusInd Bank’s Turmoil. CEO’s Short-Term Extension, Derivatives Shock, And Many Unanswered Questions

IndusInd Bank’s recent troubles are leaving investors and analysts scrambling for answers.

It all began with what seemed like a routine announcement last Friday – the Reserve Bank of India, RBI had approved the extension of CEO ’s tenure. However, the approval came with an unexpected directive – instead of the standard three-year term, Sumant Kathpalia was given just a one-year extension. This was perhaps the first red flag, hinting at underlying concerns within the regulator.

Kathpalia himself added fuel to the fire when, in a call with analysts, he suggested that the RBI was “not comfortable” with his leadership style. For a CEO to admit this so candidly raised eyebrows across the financial sector. Why would the RBI extend his tenure at all if it had reservations about his leadership? And why only for a year? The move seemed to signal regulatory caution rather than outright endorsement.

Then came the second, more alarming revelation. The bank disclosed that it had found a discrepancy worth Rs 16 billion ($184 million) in its derivatives portfolio—amounting to 2.35% of its net worth.

The issue stemmed from a practice that had been ongoing for nearly eight years. Unlike industry peers that hedge foreign currency borrowing and deposits using external counterparties, IndusInd had been using its internal desks and low-liquidity currency instruments for hedging. This practice had largely gone unnoticed until an RBI circular in September 2023 forced the bank to reassess its books, unearthing a significant risk that had been hiding in plain sight.

In response, the bank appointed an external agency to independently review and validate its internal findings. The move was meant to reassure stakeholders, and IndusInd’s promoter, Ashok Hinduja, publicly backed Kathpalia, insisting that the bank’s balance sheet remained strong and that it would still post a profit for the quarter, even after making the necessary write-offs.

Despite these assurances, the market has not been convinced. Several fund houses have slashed their target prices for the stock, signaling a loss of confidence. Over the past two years, foreign investors have significantly cut their holdings in IndusInd, dropping from 43% to just 25%. Meanwhile, domestic mutual funds have increased their stake from 16% to 30%, meaning that a large chunk of retail investors are now exposed to potential volatility.

The shifting ownership pattern suggests that while institutional investors are pulling back, retail investors, who are often the last to react, are bearing the brunt of the risk.

The question’s, plain and simple here are this –

—Why was this discrepancy not disclosed earlier? If the bank discovered the issue in September 2023 and had already unwound these positions by April last year, why did it take so long to come clean?

—Did the RBI step in because IndusInd delayed provisioning for these losses by over a year? Moreover, if these problematic transactions date back to a period before Kathpalia took over, why is the regulator still wary of his leadership?

These unanswered questions have led to growing speculation that investors should brace for more revelations.

The matter is no longer just about IndusInd, it has now put the entire banking sector under scrutiny. According to sources within the RBI, the regulator has initiated an industry-wide review, asking all banks to report their derivatives positions. If discrepancies emerge across multiple institutions, the financial sector could face a much larger shake-up than anticipated.

The Glaring Lapses

One of the most concerning aspects of IndusInd Bank’s ongoing crisis is the glaring absence of a concurrent external audit on its marked-to-market (MTM) derivative losses. This oversight has left the bank vulnerable, exposing a serious process gap that could have potentially averted the current turmoil. What makes this lapse even more alarming is that it may not be unique to IndusInd, raising broader questions about risk management practices across the banking sector.

While the bank’s treasury transactions were subject to internal scrutiny, no external auditor was tasked with a real-time review of its trading positions. Had there been external oversight, the bank’s hedging strategy might have been questioned much earlier, giving regulators and stakeholders a chance to intervene before the losses spiraled. “A concurrent audit, if conducted, would have flagged risks on MTM losses and brought them into focus much sooner,” said a risk management consultant from one of the Big Four firms.

The absence of this crucial check meant that a massive ₹1,600 crore ($184 million) loss, equivalent to 2.35% of IndusInd’s net worth, went undetected for years. This is particularly concerning given the volatility of the rupee over the same period. A concurrent audit, which involves real-time examination of every transaction rather than periodic sample-based reviews, could have provided early warning signals and significantly reduced the scale of the damage.

A Structural Weakness

Beyond the audit failure, deeper structural issues within IndusInd Bank’s treasury operations have also come to light. According to former banker and treasury veteran Manoj Rane, who was part of IndusInd’s founding team, the bank’s asset-liability management and trading business were not segregated and reported to the same leadership. This raises serious concerns about governance and internal controls.

Rane on a LinkedIn post over the weekend questioned how such a substantial hole in the bank’s books could have been overlooked by market risk heads, the global markets team, the chief financial officer, and auditors alike. He pointed out that if IndusInd’s internal hedging was truly sound, the current losses should not have surfaced due to the RBI’s recent guidelines. The fact that they did suggests either the trading book failed to hedge externally or that losses were deliberately suppressed or misreported over time.

For investors and analysts, these revelations raise a critical issue – trust. Even though, the reported loss is unlikely to shake the bank’s capital position materially, the broader implication is a severe dent in credibility as banks operate with public money, leaving little room for error.

A Volatility Risk

IndusInd’s troubles are further compounded by its reliance on large wholesale depositors, who are inherently more volatile. Nearly 54% of its ₹4.09 lakh crore deposit base comes from institutional and corporate depositors, who seek higher returns and are quick to withdraw funds if they perceive elevated risk. Unlike retail customers, who tend to be more stable in their banking relationships, large depositors can shift funds swiftly, posing a liquidity risk.

Adding to the complexity is the fact that 15% of IndusInd’s total deposits are in foreign currency, meaning these deposits must be repaid in their original denomination. Therefore, any miscalculation in forex hedging, especially considering of the bank’s internal hedging failures, could further strain liquidity and shake depositor confidence.

Rating Companies Look for Clues on IndusInd Bank’s Health, Control Issues

Meanwhile, even as the information pours in, rating agencies are scrambling to assess the financial and governance impact of IndusInd Bank’s sudden disclosure of derivatives losses, which sent shockwaves through the financial market. According to sources, the agencies are actively gathering information to determine how this material event should influence the bank’s credit rating.

Under SEBI regulations, a borrower’s credit rating must be reviewed within seven working days of a ‘material event.’ Depending on the depth of information provided by IndusInd Bank’s management, agencies may opt for a simple credit rating update or escalate concerns by placing the bank on a ‘rating watch’ with developing implications. The financial markets, meanwhile, will closely analyze the commentary and rationale behind the agencies’ decisions.

What Rating Agencies Are Watching

Rating officials have noted the RBI’s assurance over the weekend that IndusInd Bank remains well-capitalized; however, agencies are not solely relying on the regulator’s statement.

They are also monitoring key indicators such as – 

–Security Prices: Any further sharp declines in stock or bond prices could indicate waning investor confidence.

–Liquidity Position: Agencies will track the bank’s ability to manage short-term obligations.

–Deposit Withdrawals: Any signs of large institutional depositors pulling out funds would be a red flag.

–Fundraising Ability: The bank’s and its promoters’ ability to raise fresh equity will be a critical factor in determining its stability.

Additionally, given the heightened vigilance of rating agencies since the IL&FS default in 2018, any placement on ‘watch’ with developing implications signals that further review will be contingent upon additional disclosures. If negative implications are flagged, there is at least a one-third probability of a rating downgrade within the next year.

The Role of Forensic Audits and Leadership Changes

IndusInd Bank’s management is at the moment under intense scrutiny, especially in light of a forensic audit initiated by external auditors. PwC has been brought in to examine discrepancies in the bank’s derivatives accounting, while MP Chitale & Co and MSKA & Associates have formally requested a forensic review.

Key concerns raised by market participants are 

–Delayed Disclosure: Why did IndusInd only reveal these accounting discrepancies in March 2025, despite identifying issues as early as September-October 2024?

–Leadership Turmoil: The sudden resignation of CFO Gobind Jain in January, coupled with the RBI granting CEO Sumant Kathpalia only a one-year extension (despite board approval for three years), has fueled speculation about deeper governance issues.

The bank has maintained that Jain’s departure was unrelated to the derivatives losses; nevertheless, these developments raise fresh questions about the efficacy of IndusInd’s internal controls.

The Financial Impact and Regulatory Oversight

In a recent analyst call, IndusInd estimated an adverse impact of 2.35% on its net worth as of December 2024 due to the derivatives losses. This could potentially dent profits by ₹1,500 crore ($180 million), with the management indicating that the losses will likely be absorbed through the Profit & Loss statement rather than tapping into general reserves.

Despite the turmoil, the RBI has reiterated that IndusInd remains well-capitalized, citing, Capital Adequacy Ratio of 16.46% (as of Q3 FY25), Provision Coverage Ratio at 70.2%, Liquidity Coverage Ratio of 113% (exceeding the regulatory minimum of 100%).

The central bank has directed IndusInd’s board and management to implement remedial measures within Q4 FY25, ensuring full disclosures to all stakeholders.

The Last Bit. Test of Credibility

Even as agencies like CRISIL, IndiaRatings, and Moody’s are currently rating IndusInd’s bonds as AA+, the coming weeks will determine whether these ratings hold steady or face potential downgrades.

CRISIL MD & CEO Amish Mehta, while declining to comment directly on IndusInd’s rating, emphasized that a temporary stock price dip does not necessarily warrant a rating action. “We need to evaluate whether the issue is structural or temporary,” he noted.

However, IndusInd’s stock has dropped 27% in a single day and 54% year-over-year, which qualifies as a ‘material event’ per SEBI norms. Given the circumstances, rating agencies may request additional time to monitor liquidity trends before making a final call.

Beyond financial risks, there’s also an ethical concern lurking in the background. Market observers have pointed out that some top executives sold shares before this information was made public. If true, this could be a clear case of insider trading. If regulatory authorities confirm wrongdoing, it could lead to further penalties, legal action, and a deeper trust deficit between the banking sector and investors.

Even as the full extent of IndusInd Bank’s troubles is still unfolding. What is clear, however, is that the bank’s leadership and governance are under intense scrutiny, and the market’s patience is wearing thin. Whether this turns out to be a one-off misjudgment or the tip of a larger iceberg remains to be seen. 

For IndusInd Bank, the immediate challenge is not just financial recovery but restoring credibility among investors, regulators, and rating agencies.