Background
India’s banking sector is once again in the spotlight following the crisis at IndusInd Bank. IndusInd Bank, established in 1994, has been a prominent player in India’s private banking sector. Known for its aggressive growth strategies, the bank expanded its portfolio to include various financial instruments, including derivatives. In 2025, IndusInd Bank, India’s fifth-largest private lender, faced a significant financial crisis due to discrepancies in its derivatives portfolio, leading to substantial financial losses, regulatory interventions, and leadership changes.
Understanding Derivatives
Derivatives are financial contracts whose value is derived from underlying assets such as currencies, interest rates, or commodities. They are commonly used for hedging risks or for speculative purposes. Proper accounting and risk management practices are crucial when dealing with derivatives to prevent potential financial discrepancies.
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Main Reason for the Crisis
The crisis stemmed from IndusInd Bank’s failure to adhere to standard derivative accounting practices. Over the last five to seven years, the bank’s asset-liability desk hedged the foreign currency deposits that it swapped into rupees internally with the treasury desk to mitigate the interest rate risk, while the latter hedged the foreign currency risk with an external counterparty.
The external trades were marked-to-market, meaning they reflected real-time market movements and were mostly profitable for the bank, adding to its trading gains. But the internal trades were not being marked-to-market and that caused losses to remain concealed and not be reflected on the bank’s profit and loss statement until matters came to a head in March’25.
The derivative accounting practices escaped regulatory checks as the complexities of the trades and the valuation models made it difficult for regulators and the lender’s auditors to detect these lapses. This practice resulted in a $175 million hole in its balance sheet, exacerbated by the sharp depreciation of the rupee, which exposed these hidden losses.
Resignation of CFO and CEO
In January 2025, the bank’s Chief Financial Officer (CFO), Gobind Jain, resigned, citing his desire to pursue opportunities outside the organization. Subsequently, the RBI urged CEO Sumant Kathpalia and his deputy to step down as soon as suitable replacements were found and approved by the central bank. These leadership changes were direct consequences of the uncovered accounting discrepancies.
RBI Notifications and Changes
In April 2024, the RBI implemented new rules for how banks must classify and value these derivative contracts. This forced banks to mark all their gains and losses to market rates every day. It also banned internal hedging contracts — now, if banks wanted to hedge foreign exposure, they would have to go to the markets. Suddenly, banks lost the freedom in how they could recognise their trading profits and losses. IndusInd, like every bank, had to reassess its books under the new framework.
And when it did, it realized the problem: there were major mismatches in how the bank’s internal derivatives transactions had been reported all along. When those were corrected, the bank’s net worth was suddenly 2.35% lower than previously reported.
Impact on Share Price
The disclosure of the accounting discrepancies had a severe impact on IndusInd Bank’s share price. On March 11, 2025, the bank’s shares plummeted by 27%, closing at ₹656.80, marking its worst trading day ever. This decline reflected the market’s reaction to the bank’s internal control failures and the potential financial implications of the uncovered losses.
Conclusion
The IndusInd Bank crisis underscores the critical importance of robust internal controls, transparent accounting practices, and effective risk management, especially when dealing with complex financial instruments like derivatives. It highlights the need for regulatory bodies to maintain vigilant oversight and for financial institutions to prioritize compliance and ethical standards to maintain investor and public trust. IndusInd Bank’s 2025 crisis serves as a cautionary tale for the banking industry, emphasizing that aggressive profit pursuits without adequate risk management can lead to significant financial and reputational damage. The incident reinforces the necessity for banks to adhere strictly to accounting standards and for regulators to enforce compliance to safeguard the financial system’s stability.
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Authors: Umesh Vishwakarma | Director | Contact No: 9969145541
Affan Inamdar | Associate Consultant | Contact No: 8657677147
For Inquiries: Email: blogs@bilimoriamehta.com
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