Moody's places IndusInd Bank’s credit assessment on review for downgrade

The impact of the derivatives transactions, coupled with the ongoing stress in the retail unsecured loans, is likely to hurt the IndusInd Bank’s profitability, capital and funding, potentially leading to a downgrade of the BCA (Baseline Credit Assessment), according to Moody’s Ratings.

On March 10, 2025, IndusInd announced that it had identified discrepancies in the accounting of derivative transactions conducted over the past 5-7 years for hedging its foreign currency borrowings. The bank has appointed an external adviser to review the processes, determine the root cause, and assess the impact of mark-to-market losses which is expected to be completed within the next 3 months. “Although we expect the near-term negative impact on the banks' profitability and capital due to this issue to be manageable, it highlights inadequate internal controls , which is a credit negative,” said Moody’s.

Moody's has affirmed IndusInd Bank Ltd’s ‘Ba1’ foreign currency (FC) and local currency (LC) bank deposits and issuer ratings. At the same time, it has placed IndusInd's ba1 Baseline Credit Assessment (BCA) and adjusted BCA under review for downgrade.

The review for downgrade of the BCA takes into account the potential negative impact of the inadequate internal controls highlighted by the banks' accounting for derivative transactions.

The affirmation of IndusInd's Ba1 ratings with a stable outlook considers the bank's strong capital, core profitability and stable funding, which will help mitigate near term risks to its standalone credit strength or BCA.

Beyond the accounting issue, IndusInd's potential leadership changes remains monitorable, said Moody’s. The Reserve Bank of India (RBI) approved IndusInd's Managing Director & Chief Executive Officer's reappointment term for one year, contrary to the bank's Board's proposal of three years and the usual regulatory practice of extending CEO term by three years. Recently, IndusInd's Chief Financial Officer also resigned.

Furthermore, IndusInd's asset quality is experiencing some stress due to a moderation in India's economic growth and overleveraging by retail customers, the rating agency said. The gross nonperforming loans (NPL) ratio deteriorated to 2.3% at the end of December 2024 from 1.9% at the end of March 2024, primarily due to an increase in NPLs in the microfinance and credit card loan segment. While we expect IndusInd's NPLs to increase further, the bank's proactive provisioning will limit the impact on profitability and capital, it said.

“Despite these issues, we expect IndusInd's funding and liquidity to remain broadly stable, helped by the bank's domestic franchise and strong access to international funding sources. A material deterioration in the funding or liquidity will be credit negative for the ratings,” said Moody’s.

“Given the review for a downgrade of the BCA, an upgrade of IndusInd bank's ratings is unlikely in the near term. We could maintain the current BCA if the bank asset quality, profitability and capital remain broadly unchanged in the near term, while maintaining stable funding and liquidity. The stabilisation of the BCA will also be subject to the bank resolving the concerns surrounding senior leadership positions, as well as its financial controls and risk management,” the ratings firm said.