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IndusInd Bank has come under scrutiny after reporting derivative losses accounting from discrepancies in derivative transactions. The losses amount to Rs 1,577 crore — 2.35% of the bank’s net worth
The exit of IndusInd Bank’s CFO Gobind Jain, and the decision of CEO Sumant Kathpalia and Deputy CEO Arun Khurana to sell shares worth Rs 157 crore in two years put the spotlight on the bank.
The accounting fluff reported by IndusInd Bank — the fifth biggest private bank in the country – has left many alarming anomalies in the issue. The estimated impact stands at 2.35% of the bank’s net worth, amounting to about Rs 1,577 crore.
Following the revelation, the stock plunged 27% on March 11, wiping out nearly Rs 20,000 crore in market capitalisation and prompting its inclusion in the Futures & Options (F&O) ban list.
The IndusInd Bank fiasco raises serious concerns about transparency, risk management and regulatory oversight.
Let us understand what are forex derivatives, how the blunder was triggered and the impact on the industry.
What Are Forex Derivatives?
Forex derivatives are financial contracts based on currency exchange rates. Banks use these instruments to:
Protect (Hedge): Safeguard against currency fluctuations affecting their earnings.
Trade (Speculate): Earn profits by predicting currency movements.
Assist Clients: Help businesses manage their currency risks.
Some Examples of Forex Derivatives:
Forward Contracts: If a company agrees to exchange Rs 75 per US Dollar in six months, regardless of the actual market rate at that time.
Options: Imagine having the right to buy or sell dollars at Rs 75 anytime within the next three months, without obligation.
Swaps: Two parties exchange currencies periodically to manage interest rates or currency exposure efficiently.
What Led To The Derivates Loss At IndusInd?
The IndusInd Bank has come under scrutiny after reporting derivative losses accounting from mismatch in its treatment of derivative transactions – a practice that had been in place for years but was exposed after a regulatory change by the Reserve Bank of India (RBI).
An RBI circular in September 2023 mandated that all derivatives be market to market (MTM). This required assets and liabilities to be valued at prevailing market prices, exposing previously deferred losses.
During an internal review, the bank identified certain discrepancies, wherein the accounting of losses on forex derivatives/ swap transactions prior to April 2024 (over the past 5-7 years) to hedge forex deposits/ debt were not recognised through NII (net interest income), while the corresponding treasury gains were recognised in the profit and loss (P&L) statement, as mentioned in The Indian Express report.
Even though the RBI circular came into effect from April 1, 2024, the bank was not required to report losses. However, concerns were raised when the bank did not disclose losses in the June, September or December 2024 quarters. The bank tried to put the blame on the RBI’s change of rules.
Reports suggest that it is likely that IndusInd Bank was aware of the magnitude of the problem long before they claimed to have discovered it, and that the disclosure was ultimately prompted by the RBI.
Over the last six months, the IndusInd Bank share price has declined more than 53%.
Spotlight On The Bank After CEO’s Exit
The exit of bank’s Chief Financial Officer (CFO) Gobind Jain, and the decision of CEO Sumant Kathpalia and Deputy CEO Arun Khurana to sell shares worth Rs 157 crore over the last two years put the spotlight on the bank.
CEO Kathpalia sold about 950,000 shares, valued at Rs 134 crore, between May 24, 2023, and June 25, 2024. During the same period, he purchased 396,000 shares worth Rs 34 crore, according to the data from the Bombay Stock Exchange (BSE).
Deputy CEO Khurana sold 550,000 shares for Rs 82 crore over 2023-24, while acquiring 238,000 shares worth Rs 25 crore.
CFO Jain had put in papers on January 17 ahead of the disclosure of the losses, “to pursue other professional opportunities”, the bank said in an exchange filing.
On March 7, three days before the derivatives losses were disclosed, IndusInd Bank received the RBI’s approval to reappoint Kathpalia as its MD and CEO — but just for one year, from March 24, 2025, to March 23, 2026, as per The Indian Express report.
Last September, the board of directors had recommended a three-year term for its MD and CEO.
What Has The RBI Said?
The RBI allayed fears of the investors by saying they need not worry since the bank’s financial health remains stable. “There is no need for depositors to react to the speculative reports at this juncture. The bank’s financial health remains stable and is being monitored closely by Reserve Bank,” the regulator said in a statement.
The bank is well-capitalised and the financial position of the bank remains satisfactory, the RBI said.
“As per auditor-reviewed financial results of the bank for the quarter ended December 31, 2024, the bank has maintained a comfortable capital adequacy ratio of 16.46 per cent and provision coverage ratio of 70.20 per cent,” the RBI said.
Should Customers Worry?
• No. Deposits up to Rs 5 lakh are fully insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
• There is no immediate action needed on fixed deposits or savings, as the RBI has clearly indicated that the bank remains stable.
• Existing loan terms remain unaffected, but always stay updated through official communications from the bank.
Though for the investors, there are uncertainties. Experts recommend that new investors refrain from bottom fishing, suggesting it is wiser to wait for more clarity on the bank’s asset quality before considering entry, as per Mint.
Meanwhile, Bernstein – a global asset wealth management firm — believes that although IndusInd Bank’s stock is currently undervalued, a re-rating will depend on at least one-quarter of stable performance metrics.
