IndusInd Bank crisis: Why Indian banking system is robust and there's no need for panic

Recently, the Indian banking system has suffered another blow when one of India’s largest private sector banks, IndusInd Bank, revealed that it had found certain discrepancies in its derivatives portfolio. According to various media reports, the management said it was a one-time event. It expects to fully absorb the financial impact of this discrepancy in the fourth quarter and remain profitable for the quarter and the financial year. The bank also emphasised that it is adequately capitalised and growth-oriented.

This revelation by IndusInd Bank eroded the bank's net worth by ₹1,560 crores, which is 2.35% of its net worth. This has once again raised issues of governance in Indian banks. There is also panic among investors and depositors, as the bank’s shares have fallen by more than 25% in recent days. This has led to confusion and concern regarding the health of the Indian banking sector and whether there are underlying systemic risks. Consumers are concerned—after all, they deposit their hard-earned money in the banks.

It is notable that IndusInd Bank is a private bank. It’s not very long ago that the then Governor of the Reserve Bank of India (RBI), Raghuram Rajan, said that the RBI has greater powers to regulate private banks, though it lacks enough regulatory powers to oversee public sector banks. If we leave aside the NPA crisis of Indian banks, where public sector banks were more affected, we see that private sector banks have faced far more governance issues than public sector banks. Nevertheless, the RBI has sufficient regulatory powers to regulate Indian banks. The latest episode involving IndusInd Bank was brought to light due to RBI’s oversight.

Robust Central Bank Oversight

The story of IndusInd Bank is that when the bank had notional, mark-to-market gains in its hedging business, it promptly booked those gains. On the other hand, a lot of the money that it notionally lost was booked under "other liabilities," even though the same had already been lost. The bank may now likely book the derivatives discrepancy as a loss in its fourth-quarter results.

These so-called mismatches could have been covered by the bank. However, in the meantime, the RBI introduced new rules on 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 want to hedge foreign exposure, they must go to the markets. Suddenly, banks lost the freedom to recognise trading profits and losses at their discretion. IndusInd, like every other bank, had to reassess its books under the new framework.

When it did, it realised that there were major mismatches in how the bank’s internal derivatives transactions had been reported. When those were corrected, the bank’s net worth was suddenly down by 2.35% from previous levels.

Is the Indian Banking System Really in Trouble?

Consumers are concerned—after all, they deposit their hard-earned money in the banks. However, an isolated and one-time incident does not necessarily signal a broader issue. This can be said confidently because India has a strong and prudent banking sector regulator, the Reserve Bank of India (RBI), which has a track record of shielding the banking system and the broader economy from internal and global financial shocks.

If one examines the event in isolation, it is clear that the issue primarily concerns a part of a bank’s business—which it is already addressing—and does not indicate a broader problem in the banking system. To its credit, the RBI has acted swiftly and has asked for compliance reports from major banks on their foreign currency borrowings. Therefore, it is clear that the regulator is fully aware of the developing trends.

The RBI and Indian Banking Sector’s Stability

Over the past decade, the RBI has pushed banks to maintain strong capital buffers and adhere to strict prudential norms. As a result, the capital adequacy ratio of scheduled commercial banks has reached a healthy level of 16.9%, well above the Basel III benchmark.

During the UPA regime, due to the relaxation of norms under crony capitalist political influence, banks extended loans without adequate security, leading to a spike in non-performing assets (NPAs), which peaked at 11.5% in 2017–18. However, thanks to the recapitalisation of public sector banks by the government and strict regulatory norms, NPAs have been reduced to 3.12% by September 2024. This improvement reflects RBI’s consistent efforts to strengthen the balance sheets of banks since the 2016 asset quality review. As a result, occasional challenges in some banks have not undermined the overall stability of the banking system. This has been made possible through continuous review, inspection, regulation, and control by the Reserve Bank. While the RBI’s strict controls and regulations are sometimes criticised, such incidents highlight the importance of these measures. Even if the RBI is seen as over-regulating, the fact that the health of the banking system remains stable and public trust in banks is intact proves the effectiveness of its oversight.

High Liquidity & No Broader Systemic Risks

Liquidity, the lifeblood of any financial system, remains abundant in India. The RBI has skilfully managed liquidity to support economic growth while keeping inflation in check. In March 2025, the RBI decided to inject ₹1.9 lakh crore into the banking system, helping both private and public sector banks, as well as Non-Banking Financial Companies (NBFCs). In January, the central bank also announced open market operations (OMOs) worth ₹60,000 crore to inject liquidity into the system.

The RBI’s regulatory framework, including the Banking Regulation Act and the Foreign Exchange Management Act (FEMA), balances cross-border liquidity movements and capital repatriation, insulating India from external shocks. This was evident post-2008 when foreign banks retreated globally, yet India’s financial system stood firm due to RBI-enforced local incorporation rules.

Similarly, the RBI’s supervisory mechanisms ensured that the central bank could handle instances like the Yes Bank crisis in 2020, where the RBI swiftly orchestrated a rescue with a consortium of banks, averting a depositor panic. Likewise, the IL&FS default in 2018 led to further tightening of oversight to prevent a domino effect across shadow banking. These examples affirm that one-off events are manageable within India’s robust framework.

With such a proactive and reactive approach to market developments, the RBI’s actions have ensured that the Indian banking system has consistently avoided systemic risks, even during global upheavals.

Proactive Regulation

The RBI’s conservative approach, sometimes criticised as overly cautious, has been India’s shield against global financial contagion. During the 2008 financial crisis, while Western banks collapsed under subprime mortgage exposures, Indian banks emerged relatively unscathed. The RBI’s insistence on high reserve requirements and limited exposure to toxic assets ensured stability.

Thus, it can be safely said that the Indian banking system exhibits stability and consistency amidst a rapidly evolving global scenario. Historical precedents like the 2008 crisis highlight the RBI’s important role in safeguarding India’s financial health. As occasional hurdles arise, the RBI’s targeted interventions will continue to prove their mettle, maintaining trust in a system that stands tall amidst global uncertainty.

Views are personal. The author is national co-convenor, SJM & Ex-Professor, PGDAV College, University of Delhi