By Mumbai-based private sector lender IndusInd Bank has reported that its net worth is likely to take a 2.35% hit as of December 2024, following discrepancies identified in its internal derivative trades. The bank disclosed the information during an internal review, confirming that the inconsistencies do not affect customer accounts but are limited to the bank’s internal trades.
According to the bank’s official statement, the discrepancies emerged in transactions related to the derivatives book, which were non-compliant with the Reserve Bank of India’s (RBI) new regulatory guidelines, effective April 2024. The bank’s Deputy CEO, Arun Khurana, clarified in a conference call that all non-compliant internal trades that existed before April 1, 2024, have been unwound and adjustments have been made accordingly. This step is aimed at aligning the bank’s operations with the RBI’s new rules governing derivative trade compliance.
Reason for Net Worth Impact
The discrepancies in the derivatives book were internally identified by IndusInd Bank during a routine review around September-October 2024. Following the identification, the bank reported that the estimated impact on its net worth would be around 2.35%, amounting to approximately ₹1,600 crore to ₹2,000 crore.
IndusInd Bank’s Deputy CEO Arun Khurana addressed the media stating, “We can confirm that from April 1, 2024, there were no internal trades in our book. All pre-existing internal trades have been unwound and market-to-market adjustments have been accounted for.” This means the bank has stopped engaging in non-compliant internal trades and ensured compliance with RBI’s regulatory framework.
The Reserve Bank of India (RBI) had introduced new norms for investment portfolios of commercial banks in September 2023, aiming to ensure greater financial transparency and reduce risky derivative exposures. Despite these regulatory changes, IndusInd Bank continued certain internal trades that were not aligned with the new framework, which later resulted in discrepancies impacting its net worth.
Impact on Bank’s Financial Health
The bank confirmed that the impact on net worth is a one-time occurrence and will not affect customer accounts or services. Furthermore, the bank believes that despite the 2.35% reduction in net worth, its overall profitability and capital adequacy remain strong enough to absorb the financial impact without long-term consequences.
In a stock exchange filing, IndusInd Bank stated, “The estimated impact of 2.35% on our net worth is entirely due to internal derivative trade discrepancies. We have made adequate adjustments and our capital adequacy remains healthy.”
The lender has also engaged an external agency to conduct an independent review of the internal findings to validate the extent of the impact. The final report from the external agency is expected to be submitted in the next few weeks. However, the bank’s internal assessment suggests that the 2.35% net worth impact is unlikely to vary significantly from the external agency’s final evaluation.
RBI’s Shorter Tenure Extension for CEO
The account discrepancies have also raised concerns regarding the future leadership of IndusInd Bank. Recently, IndusInd Bank’s CEO, Sumant Kathpalia, was granted only a one-year extension by the RBI, which was significantly shorter than the usual three-year extension typically granted to CEOs of private sector banks.
Kathpalia acknowledged during a conference call that the derivative trade issue could have influenced the RBI’s decision regarding his tenure. He stated, “We have informed the RBI about the discrepancies and have taken corrective measures. The one-year extension may have been influenced by these events.”
Market analysts have also speculated that RBI’s shorter tenure approval reflects regulatory concerns over internal control mechanisms within the bank, particularly after the derivative trade discrepancies came to light.
Stock Market Impact
Following the announcement of the net worth decline, IndusInd Bank’s shares dropped by nearly 6% on the Bombay Stock Exchange (BSE), hitting a 52-week low of ₹881.10 per share. On the following day, the stock plunged by another 10% in pre-market trading, raising investor concerns about governance issues within the bank.
Market experts have suggested that the bank’s internal financial control mechanism must be strengthened to restore investor confidence. Analysts from Jefferies Financial Group commented, “The discrepancy in internal derivative trades indicates weak financial controls within the bank. The board and management need to ensure that future trade transactions strictly adhere to RBI regulations.”
Why the Discrepancy Matters
The primary concern surrounding IndusInd Bank’s derivative trade discrepancy is that it occurred after RBI had issued new regulatory guidelines in September 2023, which required banks to clearly differentiate between internal and external trades. The RBI’s primary objective was to ensure greater financial transparency and reduce speculative internal trading.
However, IndusInd Bank continued internal trading activities that were not in compliance with RBI’s revised norms, resulting in the bank facing a 2.35% decline in net worth. The internal review, which began in September 2024, identified that the bank did not appropriately classify certain trades, leading to an internal loss adjustment.
External Agency Review Underway
To ensure a transparent and unbiased resolution, IndusInd Bank has appointed an independent external agency to review and validate the extent of the financial impact. The agency will investigate:
- Nature of internal derivative trades.
- Reasons for non-compliance with RBI norms.
- Extent of net worth reduction.
- Accountability of internal departments.
The bank expects the external agency’s report to be consistent with its internal findings, confirming a 2.35% decline in net worth without any further impact on customer accounts.
Market Outlook and Regulatory Scrutiny
The latest incident has drawn increased regulatory scrutiny from the RBI, particularly on the bank’s internal control mechanisms. Analysts believe that IndusInd Bank’s credibility could face short-term challenges unless corrective measures are publicly demonstrated.
Additionally, there is speculation that the RBI may impose further compliance checks on IndusInd Bank’s investment portfolio, ensuring strict adherence to the new regulatory framework.
In the stock market, investors remain cautious, with IndusInd Bank’s shares declining by more than 16% in two days after the announcement. Financial analysts now await the external review report, which could either confirm the bank’s internal estimation or expose further internal control lapses.
Future Implications
Although IndusInd Bank has taken corrective measures and unwound all non-compliant trades, the 2.35% reduction in net worth has highlighted critical gaps in the bank’s risk management and compliance systems. With CEO Sumant Kathpalia now facing a one-year tenure extension instead of three, future leadership stability within the bank could also come under scrutiny.
Furthermore, if the external agency’s review finds any additional irregularities, the Reserve Bank of India (RBI) may consider imposing fines or penalties on IndusInd Bank for regulatory non-compliance.
For now, the bank has assured that its profitability and capital adequacy remain strong despite the one-time net worth impact. However, the coming months will determine whether the bank can rebuild investor confidence and maintain regulatory goodwill amidst ongoing scrutiny.
