1. Accounting Discrepancy Uncovered
- IndusInd Bank detected an accounting mismatch of ₹1,577 crore (post-tax) during an internal review of forex derivative transactions.
- This accounts for 2.35% of the bank’s net worth as of December 2024.
2. Impact on Stock Price
- On Tuesday, IndusInd Bank’s stock crashed 27.17% on the BSE, marking its biggest one-day fall since listing.
- The stock closed at ₹655.95 per share, the lowest since November 2020.
- On Wednesday, the stock recovered 5%, trading at ₹691 per share at 10:15 AM.
3. Banking Sector Precedents
- YES Bank (2020) faced a crisis due to high NPAs and low liquidity coverage ratio (LCR).
- The RBI has taken action against several financial institutions for governance and accounting issues, including:
- Aviom India Housing
- New India Co-operative Bank
- Laxmi Vilas Bank
- IL&FS
- DHFL
- Punjab and Maharashtra Cooperative Bank (PMC)
4. The Derivative Accounting Mismatch
- Banks hedge foreign-currency exposure through internal and external derivative contracts.
- External trades were marked-to-market (MTM), affecting the profit and loss (P&L) account.
- Internal trades used swap cost accounting, affecting the asset book instead of P&L.
- This inflated net interest income (NII) and hid actual trading losses, which surfaced when trades matured.
5. Regulatory Compliance Issues
- RBI’s Investment Portfolio Classification & Valuation Rules (2023) came into effect on April 1, 2024.
- Most banks complied by June 2024, but IndusInd delayed compliance until November 2024, worsening the losses.
6. Management Challenges
- CFO Gobind Jain resigned before the December quarter results.
- MD & CEO Sumant Kathpalia got only a one-year extension instead of the three-year term proposed by the board.
7. Market & Analyst Reactions
- Most brokerages downgraded IndusInd Bank’s stock due to uncertain earnings.
- Elara Capital downgraded the stock from “Accumulate” to “Sell”, citing risk of earnings downgrades.
- The bank has hired an external agency to verify losses and assess the impact.
