The cornerstone of any economy lies in its banking system. It is often said that even a slight possibility of disruption in the banking framework can unleash a storm upon the economy. This truth was vividly demonstrated on a global scale during the 2006 recession in the United States, which was triggered by the collapse of its banking sector and subsequently cast long-lasting negative repercussions on the economies of numerous nations.Presently, certain irregularities within IndusInd Bank have stirred turbulence in the Indian economy. However, it is imperative to underscore that India’s banking architecture remains substantially secure due to its constant oversight by the Reserve Bank of India (RBI). Yet, on 10th March 2025, IndusInd Bank notified SEBI of discrepancies in certain financial transactions within its accounting records, potentially impacting its profitability. This concern materialised when the bank reported a substantial loss of ₹2,329 crore for the final quarter of the previous fiscal year, spanning December to March. For the first time in 19 years, IndusInd Bank registered a quarterly financial deficit. In tandem with this, the bank’s shares have witnessed a persistent decline. Following the disclosure to SEBI on 10th March, the bank’s stock plummeted by 27 percent the very next day.

What, then, underlies this financial debacle? Typically, a bank incurs losses when its disbursed loans become unrecoverable or when interest income falls short of covering its operational expenses. However, such was not the case with IndusInd Bank. Analytical evaluations have even labelled this episode as a financial scandal, as the loss stemmed from flawed accounting practices sustained over the past six to seven years. In October of the previous year, the bank’s board became aware that proper accounting standards were not being adhered to in the treatment of forex, derivatives, and deposits in foreign currencies. This oversight had led to the persistent misrepresentation of fictitious profits in the bank’s financial statements over several years. Addressing this issue may further reduce the bank’s net worth by an estimated 2 to 3 percent.Upon learning of these discrepancies, the bank’s board engaged renowned accounting firm PwC to conduct an internal audit. Following the firm’s report, which confirmed the presence of fabricated profits in internal accounting, IndusInd Bank formally informed SEBI of the matter on 10th March 2025. In the final quarter of the 2024–25 fiscal year, from January to March, the bank revised its accounting methodology to eliminate the artificial profits, resulting in a drop in net worth and the recording of significant financial losses.

A closer examination of IndusInd Bank’s trajectory reveals an excessive reliance in recent years on deposits mobilised through non-resident Indians (NRIs), to whom it offered attractive interest rates. As per the data, by the end of the third quarter of 2024–25 (i.e., December), the bank held ₹58,600 crore in NRI deposits, constituting over 14 percent of its total deposits. The bank primarily accepted these funds in US Dollars and Japanese Yen, with tenures ranging from 3–5 years for Yen and 8–10 years for Dollars.Since these deposits were in foreign currencies, fluctuations in the Indian Rupee’s value against these currencies significantly impacted the deposit valuations. For instance, if at the time of accepting the deposit, 1 USD was equivalent to ₹75 and currently stands at ₹85, accounting policies necessitate that the ₹10 differential be recognised as a loss provision in the profit and loss account. However, IndusInd Bank failed to record such currency fluctuation losses and instead treated them as unrealised gains, reflecting them under the heading of artificial assets in its financial accounts. This misrepresentation had been ongoing for several years, resulting in the accumulation of a substantial, yet entirely illusory, figure in the bank’s financial records.

Following the exposure of this financial malpractice, several senior executives, including the CEO, tendered their resignations. Recently, the bank’s promoter, Ashok Hinduja, announced his intention to infuse capital into the bank to help arrest the continuing freefall of its shares in the stock market. However, uncertainty continues to cloud the situation, especially as some top executives sold their shares—granted under the ESOP scheme—at peak market prices, securing personal profits shortly before resigning.It is equally important to note that it remains inconclusive whether the reported loss was solely a consequence of the rupee’s depreciation against foreign currencies. There is speculation that the bank may have reinvested NRI deposits in alternate foreign currencies and failed to account for the associated losses, culminating in the present crisis. Nonetheless, the current situation at IndusInd Bank cannot be equated with the earlier crisis at Yes Bank, where unrestrained lending without due diligence led to an unmanageable repayment crisis and a looming threat of bankruptcy. In contrast, IndusInd Bank, at present, does not face such an existential threat.

Dr. P.S. Vohra is a Writer, Columnist and Financial Thinker.Views are personal