Inside the IndusInd Bank Derivative Crisis: A ₹2,000 Crore Puzzle

 In the intricate world of banking, where trust and financial transparency are paramount, even minor discrepancies can ripple into major crises. IndusInd Bank, the 5th largest private sector bank in India serving over 40 million customers, has recently uncovered discrepancies of ₹2,000 crore in its derivatives transactions.

The crisis stem from miscalculations in hedging costs tied to foreign currency deposits, particularly the bank’s aggressive expansion into Non-Resident Indian (NRI) deposits. While these deposits provided liquidity stability, they exposed gaps in the bank’s internal accounting practices and risk management frameworks. This miscalculation has caused a sharp decline in bank’s stock value, drawing intense regulatory scrutiny from SEBI and RBI. 

Let’s explore how this mismanagement occurred, its consequences, and the steps taken by the bank and the regulatory bodies to address this crisis.

Timeline of Events

 Here is a brief overview of the key events:

January 17, 2025:

The issue came into light after the resignation of the bank’s Chief Financial Officer (CFO), Gobind Jain. During his exit interview with the Reserve Bank of India (RBI) officials, he raised concerns about the inadequate accounting for derivative instruments, prompting a deeper investigation.

April 1, 2024:

The RBI’s circular, “Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023,” mandated strict accounting of derivatives. This circular has been applicable from this date.

March 10, 2025:

Following an internal review necessitated by the implementation of the RBI circular, the management of IndusInd Bank revealed that the processes related to the “Other Assets and Other Liabilities” accounts of its derivative portfolio contained discrepancies.

Nature and Causes of Discrepancies

The bank’s discrepancies in its derivative portfolio involve significant accounting management and failures in risk assessment conducted over the past five to seven years. Here is a breakdown of the root causes:

Accounting Management Issues

 • Internal vs External Desk Disparities:

IndusInd Bank aggressively grew its NRI deposit base, reaching ₹58,600 crore (14.3% of total deposits) by Q3 FY25. While this strategy provided stable liquidity, internal discrepancies emerged in the bank’s hedging practices.

The internal desk followed hedge accounting for its own foreign currency borrowings and deposits, where different departments of the bank contracted with each other to manage forex risks. The Asset Liability Management (ALM) desk transferred dollars in exchange for rupees to the Trading desk through internal trade, shifting risk internally. Gains were immediately booked on mark-to-market gains, but losses were parked under “Other Liabilities,” masking their impact. In contrast, the external desk followed mark-to-market practices, updating values in real time while hedging dollar liabilities externally via a currency swap with a global bank. Ideally, these hedges should have canceled each other, but they didn’t.

Governance Failures :

 • Auditor Oversights:

Despite auditing by multiple firms (PriceWaterhouseCoopers, Hari Bhakti, and MP Chitale), the joint auditors failed to detect the discrepancies for years. The issue was identified when foreign currency borrowings were repaid and internal trades were unwound, prompting the auditors to demand a forensic audit.

 • Delayed Disclosure:

Although the discrepancies were identified between September and October 2024, the bank only disclosed the issue in March 2025.

Market Repercussions :

Here’s a breakdown of the financial fallout:

 • Stock Price Impact:

IndusInd Bank’s share price plunged by 27%, reaching a 52-week low of ₹655.95 (BSE) and ₹656.80 (NSE) from a high of ₹1,576.35 on April 8, 2024. The bank’s market capitalization was wiped off by around ₹19,000 crore within a few hours.

 • Sector-Wide Impact:

The Indian banking sector experienced minor setbacks with the Nifty Bank Index falling by 0.7% and the Nifty 50 dipping by 0.27%. The bank’s stock had already lost 42% of its value over the previous year, and analysts believe that this discovery will lead to increased scrutiny of the bank’s internal control and compliance procedures.

 • Reduction in Net Worth:

The bank anticipates a decline in its net worth by around 2.35% (between ₹1,600 crore and ₹2,000 crore).

Regulatory Response and Measures

The regulatory response has been multifaceted, involving actions from the Reserve Bank of India(RBI) and other regulatory bodies.

Reserve Bank of India (RBI) Actions :

 • Public Assurance:

On March 15, 2025, the RBI released a statement confirming that IndusInd Bank is still in a sound financial condition. The bank’s Capital Adequacy Ratio (CAR) of 16.46% and Liquidity Coverage Ratio (LCR) of 113% are both higher than required.

 • Mandatory External Audit:

The RBI mandated the bank to engage an external auditing team, with PwC already engaged for a comprehensive forensic audit. The bank’s board and management are required to complete all remedial actions by Q4 FY25.

 • Sector Review:

The RBI has also initiated a review of derivative positions across both state-owned and private sector banks to ensure compliance with existing derivative trade rules.

Other Regulatory Bodies

 • Institute of Chartered Accountants of India (ICAI):

ICAI is expected to review the bank’s financial statements to ensure that accounting standards are upheld and the discrepancies are addressed appropriately.

 • Securities and Exchange Board of India (SEBI):

SEBI is questioning the bank’s management regarding the delay in disclosure (from October 2024 to March 2025) and remains concerned over the inability to determine the exact financial impact on the balance sheet.

Conclusion:

The IndusInd Bank derivative crisis is a stark reminder of the risks associated with inadequate accounting practices and governance failures. While regulatory bodies such as the RBI, ICAI, and SEBI have stepped in, the crisis raises critical questions about the effectiveness of internal controls and risk management within the banking sector. The lessons from this episode will likely shape future regulatory and governance practices in Indian banking.

References:

https://www.moneycontrol.com/news/business/how-deficiencies-in-derivative-accounting-at-indusind-bank-came-to-the-fore-12967737.html

https://www.financialexpress.com/market/stock-insights/indusind-bank-the-whys-and-hows-behind-the-accounting-discrepancy/3776143/

https://m.economictimes.com/industry/banking/finance/banking/indusind-auditors-seek-forensic-scrutiny-of-derivatives-portfolio/articleshow/119021969.cms

https://www.outlookmoney.com/banking/indusind-banks-operational-blunders-how-it-affects-banks-customers

https://www.business-standard.com/industry/banking/rbi-confirms-indusind-bank-stability-dismissing-market-speculation-125031500247_1.html

Blog is written by Nidhi attri and karishma giri