IndusInd saga: No escape from heightened bank vigilance
Summary
The sordid saga of this bank’s derivative trading losses has seen the exit of top executives after new relevations from Grant Thornton’s forensic audit. But the story isn’t over and we can’t afford public confidence in banks being shaken so often.
As the sordid saga of events at IndusInd Bank unfolds, it is possible the coming days will see more skeletons tumble out of its closet. Within days of a forensic audit by Grant Thornton having found—as reported by Mint—that senior bank officials were aware of lapses in its accounting of derivative trades (that led to a loss of ₹1,959 crore), first its deputy chief executive Arun Khurana and then a day later its CEO Sumant Kathpalia resigned.
The bank, which once prided itself in offering customers “sophisticated treasury products and providing them wider access to markets," is effectively headless now; the Reserve Bank of India (RBI) has asked its board to set up a panel of executives to run it.
Also Read: Mint Explainer: Who will run IndusInd Bank without senior leadership?
Grant Thornton was appointed by IndusInd to identify the root cause of the discrepancies, assess the correctness and impact of the accounting treatment of the relevant derivative contracts and establish accountability. Email trails, it appears, point to Khurana being aware of the trades in question, although in his interaction with analysts on 10 March, when the bank first disclosed the irregularities, he had portrayed the lapse as procedural, rather than deliberate, the result of adopting a new framework that the bank was required to by RBI.
Whether these were sins of omission, of failing to heed red flags raised by IndusInd’s finance department, or worse, sins of commission, may need further investigation. What is abundantly clear, however, is a failure of internal controls. No less worrying is how it got past a host of entities entrusted with guarding the interests of the bank’s depositors: external auditors, its board, and yes, also the banking sector’s regulator, RBI. The board has much to answer for.
Also Read: The IndusInd Bank share crash holds many lessons: Most of all for RBI
This blow is only the latest of a series of ignominies faced by IndusInd. In 2024, RBI imposed a ₹27.3 lakh penalty on it for violating deposit interest rate guidelines and opening bank accounts for ineligible parties. Just before the latest scandal surfaced of accounts possibly falsified to hide losses in derivatives trading, RBI had curtailed Kathpalia’s reappointment as CEO to one year, rejecting the board’s proposal of a three-year term, purportedly because the regulator was dissatisfied with IndusInd’s risk assessment process.
That’s not all. Suspicions arose of insider trading by its senior managers in 2023 and 2024, though the Securities and Exchange Board of India has reportedly closed its probe of trades by Kathpalia and Khurana on lack of evidence.
IndusInd is only the latest private-sector lender to witness a senior leadership crisis. We have seen similar stories play out at Yes Bank, RBL Bank, Lakshmi Vilas Bank, Tamilnad Mercantile Bank and at the much-larger ICICI Bank (under its former CEO Chanda Kochhar). This raises questions about RBI’s much-touted ‘fit-and-proper’ test for top executives.
Also Read: IndusInd Bank case: Who is India’s real lender of last resort?
While our public sector banks are often seen as sloppy, there may be something to be said for the robustness of their systems. When quizzed about the happenings at IndusInd Bank at the post-monetary policy conference on 9 April, RBI Governor Sanjay Malhotra described the recent events as “episodes," not a “total failure," and said that India’s overall banking system was “safe, secure, robust and resilient."
That may well be so. But each such episode weakens public confidence in banks. The amount of money lost by IndusInd doesn’t put its survival at stake, but if vigilance is weak, what happens with small sums could also happen at a larger scale.
