Why IndusInd Bank is under a cloud of ‘fraud'

India Today

3 days ago

(NOTE: This article was originally published in the India Today issue dated June 9, 2025)May 22 was indeed a grim day for 76-year-old Ashok P. Hinduja, chairman of IndusInd International Holdings Ltd (IIHL) and promoter of IndusInd Bank. For the first time in nearly two decades, the bank reported a quarterly net loss—an alarming Rs 2,328 crore. The causes: accounting discrepancies, suspected fraud and mounting stress in its microfinance portfolio. Spooked investors sent the bank's shares tumbling. Both CEO Sumant Kathpalia and deputy CEO Arun Khurana had stepped down in April. On May 28, the Securities and Exchange Board of India (Sebi) passed an interim order against the duo over alleged insider trading, restraining them from accessing the securities market. Six days before, Sebi chief Tuhin Pandey had said the matter was actually 'RBI's remit'—the central bank was already on the case since March. Sebi would concern itself only 'if there are any egregious violations by anyone', Pandey said. Subsequent events imply something on those lines may have indeed gone on.advertisementBefore all the ash started flying, Hinduja had put on a brave face on the disappointing quarterly results, saying the bank's board has taken 'appropriate, swift' action. But the scale of losses, and more so the suspected fraud behind it, have shaken up what is India's fifth largest lender, with over 41 million customers and deposits of over Rs 4 lakh crore. Though the bank has claimed it is well capitalised, the recent events have threatened to erode its reputation, even as more instances of accounting errors and discrepancies keep surfacing. 'Every line of defence at IndusInd Bank seems to have failed to detect these discrepancies,' says financial consultant Ashvin Parekh. 'A detailed investigation will certainly be conducted, particularly so if it is suggesting intentional non-compliance.'Conceptualised by Srichand P. Hinduja, the eldest of the Hinduja brothers and erstwhile chairman of the Hinduja Group, and established in 1994, IndusInd Bank was the first among the new-generation private banks in the post-economic liberalisation era. Ashok, the youngest of the deceased Srichand's three brothers, chairs the Hinduja Group of companies in India. IIHL holds around 16 per cent stake in the bank, and has the Reserve Bank of India's (RBI) consent to raise it to 26 per cent (see chart). Its key customers include large corporates, small and medium enterprises (SMEs) as well as retail clients, with a focus on commercial vehicle financing. The bank had a network of 2,984 branches and 2,956 ATMs as of FY24.advertisement
DISCOVERY OF A 'FRAUD'No one could have predicted such a drastic turn of events at the bank. It came under the RBI's radar in early March, when the central bank denied Kathpalia a three-year extension and granted only a year instead. On March 10, the bank's senior management held a conference call with analysts, stating discrepancies had been found in the derivatives trading portfolio and that the bank expected to take a financial hit of Rs 1,900-2,000 crore as a result. Derivatives are financial contracts whose value is determined by the price of an underlying asset, such as stocks, bonds, commodities or currencies. They are used for various purposes, including hedging risk, speculating on price movements and potentially earning profits. At that stage, Kathpalia said the problem was specifically in the internal deals for foreign currency liabilities.It is standard practice for banks to hedge currency risks to minimise potential losses from exchange rate fluctuations. IndusInd Bank, too, used derivative instruments to manage such risks. However, during a review of its processes to comply with RBI guidelines on investment portfolios—effective April 2024—the bank discovered 'some gaps' in the positioning of its derivatives. It found the anomalies around October-November last year, and hired an external agency to investigate the matter, in addition to an internal enquiry, Kathpalia told the media. Strangely enough, Gobind Jain, the bank's CFO, resigned in January, to 'pursue opportunities outside the bank', following which Khurana stepped into the role.advertisement'Derivatives are complex instruments. Usually, there are multiple underlying assets which are at risk, resulting in complex valuation as well as accounting treatment,' says Parekh. 'The underlying risk may include interest rates, market rates or exchange rates, which are dynamic and volatile. The combination of such underlying risks requires proper assessment of value at risk.' On March 20, the bank announced that it had appointed a new external agency to conduct a root cause analysis and assign accountability. On April 27, it said the agency found that the discrepancies would lead to a financial hit of Rs 1,960 crore. Khurana resigned the next day, and Kathpalia, a day later, taking moral responsibility.advertisementThe bank has said that a committee of executives will manage operations at present and that it is on the hunt for a new CEO. On May 9, it issued a fresh disclosure, stating it was investigating insider trading allegations against Kathpalia and Khurana. This was followed by disclosures of Rs 674 crore in 'incorrect interest income' recorded in the microfinance division, and Rs 595 crore in unsubstantiated balances under other assets. Both issues, however, were closed as of January, the bank said. J. Sridharan, executive vice chairman of the microfinance arm, Bharat Financial Inclusion, has also tendered his resignation.Experts believe the bank failed on several fronts. 'There seems to be a culture and governance breakdown. The bank was trying to grow at any pace,' says Abizer Diwanji, founder, NeoStrat Advisors. 'Whenever cyclical issues hit it, they chose to ignore them.'Mid-sized banks are always vulnerable to market perceptions. Given the high cost of doing business, they often engage in riskier activities than their larger counterparts. In such cases, banks should consistently make provisions in their books for creditors. 'IndusInd tried to grow in the high-yield, unsecured SME segment, and when things hit the roof, they did not have provision cover, and had to do things like derivative accounting,' Diwanji says. 'When you tend to compromise on accounting, you tend to compromise on governance.' As it happens, the Hindujas were also borrowing against IndusInd shares to finance the Reliance Capital acquisition, and may not have wanted the share prices to crash.advertisementHad the bank valued its assets dynamically and regularly, with proper quantification of the value at risk, it could have identified the 'gap' and taken appropriate measures to address the loss in value. 'But here, the underlying valuation itself is a question mark, giving an impression that all the three offices were involved—the front office that does the trade, which holds the instrument or decides to buy the instrument; the mid-office, which is expected to evaluate the risk regularly and dynamically; and the back office, which is supposed to account for it,' says Parekh. 'All the three seem to have either failed or connived.'Many are surprised that such practices went undetected by the senior management for years. The first line of defence is the trader; the second is the senior managers, who may not have asked the necessary questions. The third level comprises the bank's executive directors. It remains unclear whether they implemented proper controls or were prevented from doing so. Beyond these three layers, one would expect the audit committee, along with the internal and external auditors, to examine valuation and accounting practices—followed by oversight from the board of directors and the promoters. IIFL estimates that IndusInd has taken around Rs 4,700 crore hit on its profit and loss statement due to all the 'frauds'. The brokerage has downgraded the IndusInd Bank stock. The bank's shares closed at Rs 804.75 on the BSE on May 28, nearly half of its highest level of Rs 1,550 a year ago.advertisement
STEADYING THE SHIPAlthough the issues at IndusInd Bank point to serious corporate governance failures, there is no worry yet on its financial health. Hinduja has clarified that the bank is adequately capitalised, with a capital adequacy ratio of 16.24 per cent as of March. The RBI also said on March 15 that the bank was 'well-capitalised and the financial position of the bank remains satisfactory'. Sunil Mehta, the bank's chairman, told analysts on May 21 that they are 'taking further measures to improve internal controls and processes to prevent such lapses from occurring again.'Diwanji says the bank should look at its own business model of high-cost lending. Moreover, the board should oversee internal developments and pay closer attention to whistle-blower complaints. For instance, red flags should have been raised when Jain resigned in January. Last but not the least, the management has to rebuild trust—that begins with a change in work culture. They should allow information to flow and act when necessary, rather than stall the flow of information, he adds.With more and more skeletons tumbling out of its closet, IndusInd Bank has to methodically work to resolve its current issues besides building new systems to prevent a recurrence and restore the confidence of its investors and customers.Subscribe to India Today Magazine