IndusInd Bank CEO Steps Down Amid Derivatives Accounting Controversy

The managing director and chief executive officer of IndusInd Bank left his post on April 29, just hours after the stock market closed and right after the bank allegedly announced that it was thinking of redoing assets on its balance sheet, something that S&P Global Ratings had already flagged as a concern. The poor handling of derivatives by the bank was also cited as a reason for Kathpalia's swift departure. And the bank's low capital ratios were a huge problem. The bank's plan was to raise capital through a rights offering; however, the offer was downsized in respect to the amount of stock that insiders would buy.

The resignation comes after a stormy few months for the lender. The Reserve Bank of India (RBI) granted only a one-year extension to Kathpalia, who had been asking for a full three-year term to finish his work. Kathpalia's exit lines up with that of Deputy CEO Arun Khurana, who has also stepped down and admitted to having a part in overseeing the treasury operations involved in the accounting mess.

Derivatives Discrepancies Rock Bank’s Financials

Central to the crisis is a mismatch in the bookkeeping of the bank's internal derivative trades. An initial disclosure from IndusInd Bank indicated a possible adverse effect of 2.35% on its net worth as of December 2024. This led to a one-day stock plunge of 26%, incriminating a lot of investor coffers in the bank.

The damage was later estimated by the external audit firm PwC at INR 1,979 crore, slightly lowering the potential impact to 2.27% of net worth. A forensic audit submitted on April 26 by Grant Thornton found that the main reason for the misreporting was the incorrect recording of notional profits from internal derivative trades that were terminated prematurely.

The consequences of these disclosures are being felt at the highest levels of the bank. The following urgent actions are now taking place:

• Responsibilities at the senior level are being restructured.
• Stricter internal controls are being implemented.
• Interim Leadership and Regulatory Response

RBI's Calming Influence

After high-level departures, IndusInd Bank has asked for the Reserve Bank of India’s approval to set up a committee of senior executives to manage the CEO’s responsibilities during the interim period.  The board is said to be reviewing existing leadership positions, with an eye toward sorting out who should be held accountable for what, and going forward, ensuring that lapses of this kind don’t happen again.

In spite of the upheaval, the Reserve Bank of India has tried to calm the market. It has specifically stated that IndusInd Bank is well-capitalized and in good financial health. RBI Governor Sanjay Malhotra has even called it an "episode" instead of a call for the Indian banking system as a whole being under duress, saying that the Indian banking system is safe and stable.

The bank must now confront two tasks: regaining the trust of investors and stabilizing its leadership. Although we can expect continued stock volatility in the short term, the bank's swift actions, including appointing independent auditors and starting a forensic review, indicate a willingness to address head-on the sorts of internal weaknesses that gave rise to this mess.