IndusInd Bank – too big to fail?

IndusInd Bank

By Vidya Rajarao 

On 10 March 2025, IndusInd Bank notified the Mumbai and the National Stock exchanges of a ‘discrepancy’ relating to other assets and other liability accounts of the derivatives portfolio. In an analyst conference call on the same date, the bank stated that:

* these discrepancies occurred since the inception of the derivatives desk at the bank;

* these discrepancies occurred over a 5-to-7-year period;

* internal review of these discrepancies commenced sometime in September 2024;

* an external agency was appointed to validate the analysis of the internal review; and

* the estimated impact of these discrepancies was an adverse impact of 2.35% on the bank's net worth as of December 2024.

The above disclosures rattled the markets and IndusInd Bank’s shares plummeted by almost 30% and wiped-out Rs 20,000 crore in market capitalisation.   These so-called “discrepancies” are in reality, fraudulent as the bank knowingly hid such losses on its Balance Sheet.

Basically, IndusInd Bank’s forex positions were naked and not hedged, leading to losses. Also, the bank failed to apply mark-to-market accounting wherein, at each quarter-end/year-end, derivative positions are marked to market, and consequential gain or loss is recorded.

Instead of accounting for these losses in the Profit & Loss Statement (this has the effect of reduced net profits or increased net loss), the bank, in a brazen act that continued for 5-to-7 years, recorded such losses on its derivatives portfolio as an asset (receivables or intangibles) on its Balance Sheet.

In simple terms, this is nothing, but an age-old fraud scheme called “hang the debit in the Balance Sheet!”

IndusInd Bank must therefore undertake an independent forensic investigation to address the following issues:

1) Why did this issue remain undetected for 7 years?

The bank has confirmed that the fraudulent activity of treating losses as recoverable assets and hanging the debits in the Balance Sheet either, as customer receivables or intangibles, has been practiced for around 5-to-7 years. Clearly, the personnel in the treasury and risk management function were aware of these losses and yet, failed to properly account for such losses in the bank’s financial statements.

Moreover, the bank is struggling to quantify the losses on its derivative portfolio as on date despite the fact that, the RBI circular was effective from April 2024 and the bank has had almost twelve months to comply with the RBI guidelines. This is a clear failure of the bank’s treasury and risk management processes especially since the transactions are historical and data should be readily available.

The forensic investigation will reveal the web of deceit and tricks played by the treasury and risk management personnel and more importantly, answer the question as to whether these losses are limited only to the derivative portfolio or are there other skeletons lurking in the closet, hidden by rogue personnel in treasury and risk management?

2) Delinquent Board

The bank’s Audit Committee and Board of Directors is a veritable who’s who of India Inc. and includes at least two Chartered Accountants and professionals adept in the banking industry.

What was the level of oversight and supervision exercised by the Audit Committee and Risk Committee over a period of 5-to-7 years?

During the 5- or 7-year period, what was the level of interactions and discussions between the management of the bank and the Board with respect to treasury and risk management?

Did the Audit Committee, Risk Committee, or Board review the bank’s policy on hedging, the extent of forex activities that were not hedged, and the losses on the derivatives portfolio?

The Board is clearly delinquent and has failed to establish a culture of governance and compliance at the bank. The Board has not exercised its fiduciary duty of oversight and supervision of a critical function in a bank i.e., treasury and risk management. It is time for SEBI to establish a mechanism to review and penalise ineffective Boards and institute blacklisting of Board members who have failed to exercise their fiduciary duty akin to the blacklisting of Chartered Accountants by NFRA.

3) Management culpability

It is simply inconceivable that bank management was not aware of the losses. The claim that the losses are due to recent RBI guidelines is absurd as mark-to-market accounting is an age-old accounting practice. Having open and unhedged forex positions that led to losses and waiting for a windfall gain in the future to offset those losses is a colossal failure of leadership.

Hiding such losses deliberately for an extended period of time and not recording the losses properly for over five or seven years is reprehensible and the C-suite including the CEO, CFO, CRO, and COO must be taken to task and account for their cover-up.

Interestingly, the CFO Mr. Jain resigned in January 2025 ostensibly due to personal reasons and Mr. Khurana, the bank’s deputy CEO has been given additional charge as CFO. The CEO, Mr. Sumant Kathpalia has received only a one-year extension as the RBI has an issue with Mr. Kathpalia’s leadership.

What was the involvement of these C-suite individuals in the cover-up? Were the unhedged positions and losses known to the C-suite? What was the level of diligence and supervision exercised by the C-suite in establishing the bank’s risk management process, systems, and controls? Clearly, the tone at the top with respect to the integrity of financial reporting commencing with the CEO was sorely lacking due to the absence of a good governance culture at the bank.

Ethics, integrity, and good governance have been severely compromised at the bank and the C-suite members are blatantly disregarding the RBI guidelines in quantifying the losses and recording them properly in the bank’s financial statements.

Explanations of an estimate of losses (as a percentge of net worth as of December 2024) are ludicrous and the C-suite members must be held accountable for their role in the fraud.  If the bank has already unwound positions that were existing prior to or on 1 April 2024 and applied mark-to-market accounting for past positions, why is it that the bank is unable to quantify the impact almost twelve months since April 2024?

The final nail in the coffin is that the Board and management do not appear to be transparent in dealing with the fraudulent conduct. The bank has retained PwC (according to media reports) as the external agency to quantify losses despite the fact that Price Waterhouse Chartered Accountants LLP was the bank’s statutory auditor in March 2018, when the derivatives desk was setup at the bank.

4) Failure of auditors

Over the 5-to-7-year period, the bank has been subject to various audits - internal audit, treasury audit, concurrent audit, statutory audit, and reviews by the regulator.

The bank’s statutory audit has been undertaken by five different accounting firms from Price Waterhouse Chartered Accountants LLP (March 2018), M/s. S. R. Batliboi & Co. LLP, a member firm of Ernst & Young in India (March 2019), M/s. Haribhati & Co. LLP (March 2020 – March 2022), M/s. M. P. Chitale & Co and M/s. M S K A & Associates, a member of the BDO network (March 2023 and March 2024).

Why did the internal audit, treasury audit, and concurrent audit fail to detect these losses and more importantly, did not flag deficiencies in the treasury and risk management processes and systems? What information was disclosed to the auditors and what were the audit procedures in relation to derivatives and mark-to-market accounting?

The NFRA must, on a suo moto basis, review the audit working papers and the audit procedures performed by the statutory auditors and sanction such audit firms as appropriate.

5) Failure of regulators

The banking regulator, RBI, cannot be absolved since the RBI also conducted several inspections of IndusInd Bank. Further, the RBI has been lackadaisical in enforcing its Master Direction and guidelines effective April 2024 by allowing the bank almost 12 months to apply such guidelines. The RBI, in its zeal to prevent a run on the bank, has unwittingly created a free pass for accounting shenanigans and fraud.

Is IndusInd Bank too big to fail? Why did RBI approve a one-year extension to the CEO Mr. Kathpalia despite misgivings about his leadership?

In conclusion, the issue of unhedged forex positions and not recording losses seems to be an open secret at the bank and an independent forensic investigation must establish at a minimum, the who, what, why, and how of fraud at IndusInd Bank. The bank’s shareholders and the regulator (RBI and SEBI) can then take necessary remedial actions, including, replacing the individuals involved in the fraud, to prevent and strengthen the bank’s risk management culture, processes, and systems.

(Vidya Rajarao is the founder and CEO of Fraudopedia. She is a Certified Fraud Examiner and an expert forensic accountant.)

Views are personal and do not represent the stand of this publication.