In a stunning revelation, IndusInd Bank has admitted to significant discrepancies in its derivative portfolio, resulting in an estimated adverse impact of 2.35% on its net worth. The estimated loss works out to around ₹1,529.90 crore, based on the bank’s net worth of ₹65,102 crore as of December 2024. The bank had clocked a profit of ₹6,628 crore during the nine months of the current fiscal year.

During a hastily arranged investor call this evening, Managing Director and CEO Sumanth Kathpalia sought to reassure stakeholders that the issue was contained, and that the bank’s capital adequacy remains strong enough to absorb the hit. However, the revelation has cast a long shadow over the institution’s credibility, with analysts grilling the management on how such a discrepancy went unnoticed for years.

The bank revealed that the issue was unearthed during an internal review of its other assets and liabilities accounts linked to its derivative portfolio. According to Kathpalia, the discrepancies were identified only in September and October of last year, prompting the bank to appoint an external advisor to ascertain the root cause. The findings have already shaken investor confidence, with concerns about whether this is merely the tip of the iceberg.

The revelation has triggered intense scrutiny, with analysts questioning whether the bank’s reported profits had been artificially inflated for years. The lost amounts were previously reflected in the interest income line, raising concerns about the accuracy of past financial statements. Investors are now demanding clarity on how much of the past profits were overstated and whether historical numbers need to be adjusted.

The management has clarified that these discrepancies stem from the bank’s foreign currency deposits and borrowings, which were converted into rupee using derivatives. While the bank assured investors that all foreign currency positions were fully hedged, the internal trading process used for these conversions appears to have masked critical valuation gaps.

The bank admitted that internal trades were accounted for using swap valuation methods, while external trades were marked to market. Over time, the divergence in accounting treatment led to an accumulated loss that only came to light after regulatory changes forced a review.

The shocking part of the revelation is that the bank’s internal audits, external statutory audits, and even regulatory inspections by the Reserve Bank of India (RBI) failed to detect these discrepancies. This has raised alarms about potential systemic failures in the auditing process. Analysts on the call repeatedly questioned how such a significant issue could remain undiscovered for years, especially given the multiple layers of oversight that treasury operations undergo.

One of the most unsettling aspects of the conference call was the timing of the departure of the bank’s chief financial officer (CFO), who resigned just months before this issue came to light. While management has denied any direct link between the CFO’s exit and the derivatives fiasco, investors remain skeptical. Did the CFO leave because he foresaw this crisis, or was it merely a coincidence?

The bank has confirmed that the Reserve Bank of India (RBI) has been kept in the loop regarding the issue, with preliminary updates provided last week and a final update delivered recently. However, the fact that the RBI’s supervision failed to catch this massive accounting lapse is raising eyebrows in regulatory circles. Could more such issues be lurking beneath the surface at other banks?

Kathpalia's own tenure is now under intense scrutiny. Despite the board approving a three-year extension for him, the RBI has only granted a one-year renewal, a move that now appears to be directly linked to this crisis. When asked about his uncertain future, Kathpalia acknowledged that this episode could have played a role in the RBI’s cautious stance. “I don't know what the rationale for them giving me one year is, but I think they are uncomfortable with the way my leadership skills of running the bank. We have to respect that. This is a litmus test for the bank,” he conceded.

IndusInd has assured investors that no further internal trades will be conducted, and that all historical discrepancies will be accounted for in financial statements. But will this be enough to restore confidence?

For now, the stock, which has come off 6% YTD and 37% over the past six months, could come under further pressure in the coming days.

With IndusInd’s credibility under fire, the coming months will be critical in determining whether the bank can regain its standing—or whether more skeletons are waiting to emerge from its balance sheet. Interestingly, the Hindujas, who collectively hold around 16.5% stake in the bank, are looking to increase their stake to 26%.