India’s fifth-largest private lender, IndusInd Bank, is facing increasing scrutiny following a series of red flags that have rattled investors and regulators alike. As reported by the Financial Times, the crisis was set into motion last Friday when the Reserve Bank of India (RBI) approved only a one-year extension for CEO Sumant Kathpalia, a stark contrast to the usual three-year tenure. Kathpalia later admitted that the RBI was “not comfortable” with his leadership style, raising further concerns about the bank’s governance.
Adding to the turmoil, IndusInd Bank disclosed a significant discrepancy of Rs16bn ($184mn) in its derivatives portfolio. The issue, dating back nearly eight years, involved hedging foreign currency exposure using internal desks and low-liquidity currency instruments rather than external counterparties—an unusual practice in the banking industry. The irregularity was identified in September 2023, following an RBI directive to review portfolios. However, the delay in disclosure has only deepened investor unease.
The stock market has responded sharply. IndusInd shares plummeted 27% on Tuesday, marking their worst single-day drop, followed by an additional 1.84% decline on Wednesday, closing at Rs672.10. While Ashok Hinduja, chairman of the bank’s promoter company, has backed Kathpalia and assured that IndusInd remains financially strong, the market remains skeptical. Major fund houses have slashed their target prices, and foreign investors have reduced their stakes in the bank from 43% to 25% over the past two years. Meanwhile, domestic mutual funds have increased their holdings, putting retail investors at risk.
Several unanswered questions loom over the crisis. If the bank identified these discrepancies in September 2023 and claims to have unwound them by April last year, why was the disclosure delayed? Did the RBI intervene because the bank postponed provisioning for losses? If these irregularities predate Kathpalia’s tenure, why is the central bank still wary of his leadership?
The RBI has now initiated an industry-wide review, requiring all banks to report their derivatives positions. Should other financial institutions reveal similar discrepancies, the fallout could extend beyond IndusInd, affecting the broader banking sector and stock markets.
