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Kathpalia’s exit comes more than a month after the bank disclosed likely losses from unaccounted exposure on its derivatives book, raising questions about corporate governance, accounting, and audits-both internal and external-during his more than five-year tenure.
What is the root cause of IndusInd’s problems?
This issue first emerged on March 10, when IndusInd Bank disclosed that mark-to-market (MTM) losses in its derivatives book could impact up to 2.35% of its net worth as of December 2024, amounting to nearly ₹1,600 crore. The discrepancies arose due to faulty accounting of internal derivative trades. These losses were allegedly concealed to report higher profits that would boost the bank’s stock valuation. As a result, transactions over many years were distorted, inflating profits. But this has cost the bank the trust of investors-and potentially depositors too.Why is it such a big problem?
Because it struck at the very root of the institution: corporate governance. The bank’s stock has lost over a quarter of its value, as investors worry there may be more skeletons in the cupboard. That the CEO resigned nearly seven months after the issue came to light raises concerns about whether the financial hole could become a crater.
Can this blow up like the Yes Bank crisis?
The key difference between Yes Bank and IndusInd Bank is that Yes Bank’s founder, Rana Kapoor, was both CEO and in control of the board and management. That enabled him to engage in unprofessional conduct, including discretionary lending. A ring of entities, possibly including NBFCs, indulged in circular financing, hiding bad loans that eventually unravelled.
In contrast, for IndusInd, the discrepancies so far seem limited to the derivatives book. There are no allegations of hidden NPAs or irregular lending practices. So, the damage might be far less than what happened at Yes Bank, which had to be bailed out by the RBI.
How does IndusInd compare with RBL and Bandhan?
In the last five years, six private sector bank CEOs-including ICICI Bank’s Chanda Kochhar-have resigned amid controversy over mismanagement, governance lapses, or regulatory troubles. At RBL Bank, rising NPAs from corporate loans and reliance on wholesale deposits triggered a crisis. CEO Vishwavir Ahuja stepped down, and RBI-nominated directors took over while a CEO search was underway.
In Bandhan Bank’s case, the RBI did not extend the CEO’s term, reportedly due to an ongoing forensic audit by EY into loans worth ₹23,300 crore at the behest of the National Credit Guarantee Trustee Company (NCGTC).
Is IndusInd similar to Lakshmi Vilas or Global Trust Bank?
As of now, it doesn’t appear so. Both those banks were promoter-controlled. Lakshmi Vilas Bank had long-standing issues, with a dominant shareholder manipulating the board and loan approvals. It was eventually merged with Singapore’s DBS Bank.
Global Trust Bank, on the other hand, collapsed due to heavy stock market exposure. Promoter Ramesh Gelli tied the bank’s fate to stock market operators, and the RBI swiftly merged it with Punjab National Bank.
Is IndusInd different?
Yes. Kathpalia is not part of the promoter group and did not wield the kind of influence that Kapoor or Gelli had, where governance collapsed across departments. The promoters here-the Hinduja family-first rose to prominence in the 1980s Bofors scandal. Their funding activities, share pledges, and bankruptcy court purchases have faced regulatory scrutiny. Still, governance is believed to have improved under former CEO Romesh Sobti, who retired at the onset of Covid-19, though some gaps may remain.
What next for IndusInd Bank?
To be sure, the bank’s losses-less than 2.5% of net worth-are manageable, unless further surprises emerge. Earlier this month, ET reported that the bank hired EY to audit a ₹600 crore discrepancy in its microfinance portfolio’s interest income. The bank later clarified that EY is assisting with an internal audit. Since microfinance makes up nearly 10% of the loan book, further misreporting could prove costly. IndusInd has already hired global executive search firm Egon Zehnder to find a new CEO, ET reported in March. An interim head is expected to take over before a permanent appointment is made, to help clean up the mess.
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https://economictimes.indiatimes.com/markets/stocks/news/indusind-bank-crisis-ceo-exits-after-rs-1959-crore-loss-disclosure-how-bad-is-it/articleshow/120780929.cms