IndusInd Bank’s Accounting Crisis: A Wake-Up Call for Investors and Regulators

IndusInd Bank is in the middle of a financial storm, with revelations of accounting discrepancies in its derivatives portfolio leading to a steep decline in its share price. The crisis raises serious concerns about corporate governance, transparency, and risk management within the banking sector. With an estimated loss of ₹2,100 crore and growing uncertainty over leadership stability, investors and regulators must take a hard look at the bank’s internal controls.

Accounting Errors and Their Financial Impact

At the heart of the crisis is a massive ₹2,100 crore accounting error in IndusInd Bank’s derivatives portfolio. To put it in perspective, this amount represents 2.35% of the bank’s total net worth—a significant hit.

What Went Wrong?

The bank used two different methods to track its hedging costs. The internal trading desk used a method called hedge accounting, which showed a more favorable financial picture. Meanwhile, the external trading desk followed mark-to-market accounting, which reflects real-time market values.

The discrepancy between these two methods led to misreporting of financials, artificially boosting the bank’s reported profits.

The Immediate Fallout

The revelation of this issue caused IndusInd Bank’s stock to plummet by 27% as investors lost confidence. The ₹2,100 crore error will be deducted from the next quarter’s profit, likely pushing the bank into a net loss for that period.

To put this into perspective, the bank’s December quarter profit was ₹1,400 crore—which means the accounting error alone wipes out more than one quarter’s entire earnings. An external audit is now underway, and analysts fear the actual loss could be even higher.

Erosion of Investor Trust and Management Scrutiny

Banking operates on trust. If investors and depositors doubt a bank’s financial integrity, it can create panic. The delayed disclosure of this error—five months after its discovery in October 2024—has only worsened the situation.

The Chief Financial Officer (CFO), Govind Jain, resigned even before the bank announced its quarterly results, fueling speculation about deeper financial troubles. The Reserve Bank of India (RBI) granted CEO Sumant Katpalia only a one-year extension, instead of the sought three years, signaling regulatory concerns.

Reports suggest that both the CEO and Deputy CEO sold a large portion of their shares before the crisis became public. The CEO alone sold shares worth ₹118 crore at ₹137 per share, which now raises questions about insider knowledge and ethical concerns.

Foreign Institutional Investors (FIIs) had already reduced their stake in the bank before the news broke.

Domestic Institutional Investors (DIIs), including mutual funds and insurance companies, increased their holdings, possibly underestimating the severity of the situation.

This contrast in investor behavior shows if foreign investors saw red flags early, while domestic institutions were absorbing the potential losses.

Past Issues: A History of Red Flags

This isn’t the first time IndusInd Bank has faced governance concerns.

A whistleblower accused IndusInd Bank’s subsidiary, Bharat Financial Inclusion, of giving loans to borrowers who had already defaulted. This practice, known as evergreening of loans, is a way to artificially reduce bad loan figures by issuing fresh loans to struggling borrowers. The bank dismissed the issue as a “technical glitch”, but it raised serious concerns about transparency.

IndusInd Bank has ₹39,000 crore in microfinance loans, with major exposure in Bihar, Jharkhand, and Maharashtra. The bank has been witnessing high default rates in these areas, leading to a 39% drop in microfinance-related earnings last quarter.

The CEO acknowledged that this stress could continue, with hopes for improvement only in the next financial year. All these issues paint a troubling picture: IndusInd Bank has been facing financial stress for a while, and the recent accounting error just exposed deeper problems.

Implications: What Happens Next?

The coming months will be crucial for IndusInd Bank. Here’s what to watch:

• If the audit reveals a bigger loss than ₹2,100 crore, investor confidence could deteriorate further. And if new governance lapses are found, regulatory action from the RBI might follow.

• A shortened CEO tenure suggests regulatory skepticism. The bank needs strong leadership to restore trust, but the departure of key executives raises concerns about continuity.

• Loan defaults in rural areas might increase, especially if economic conditions worsen. The bank will have to tighten risk controls and improve its lending policies to avoid another crisis.

• Investors should prepare for continued volatility in IndusInd Bank’s stock. If the bank shows strong governance reforms, its share price might stabilize over time. However, if more negative surprises emerge, further stock price declines could follow.

Conclusion: A Moment of Reckoning for IndusInd Bank

IndusInd Bank’s crisis is a cautionary tale of financial misreporting, leadership instability, and governance lapses. While the bank has an opportunity to rebuild investor trust, it must take decisive steps to strengthen internal controls and improve transparency.

For investors, this is a classic case of why due diligence matters. Watching financial statements alone isn’t enough—understanding management actions, corporate governance, and regulatory signals is equally important.

The next few months will determine whether IndusInd Bank can emerge stronger or if this is just the beginning of a deeper crisis. Either way, the lessons from this debacle will shape banking regulations and investor strategies for years to come.