IndusInd Bank Crisis Raises Concerns Over Governance and Regulatory Transparency

Context:

RBI approved only a one-year extension for MD & CEO Sumant Kathpalia, despite the bank’s board recommending a three-year term. This follows a previous instance where RBI had approved a two-year term against a three-year recommendation.

Accounting Discrepancies and Market Reaction

• The bank disclosed derivatives accounting discrepancies amounting to 2.35% of its net worth.
• Required provisioning of around ₹1,600 crore due to these issues.
• The bank’s stock plummeted by over 25% in a single trading day.

Internal Control and Risk Management Lapses

• Discrepancy arose from differing treatments of derivatives exposure between the asset-liability management (ALM) team and the treasury desk.
• Treasury positions were marked-to-market, but internal contracts were not, creating accounting gaps.
• The issue was identified following an RBI circular in September 2023, mandating the discontinuation of such internal trades from April 1, 2024.

RBI and Market Communication

• RBI issued a public statement reassuring that IndusInd Bank is stable, with no risks to depositors.
• The bank’s promoters have expressed willingness to inject capital if required.

Key Questions Raised

1. Disclosure Gaps:

• Why were these issues not disclosed to markets earlier?
• Were auditors and the RBI fully aware of these discrepancies beforehand?

2. Appointment Decisions:

• If the RBI does not fully trust the board’s judgment in reappointing an MD for three years, why approve even a shorter term?
• Lack of clarity in such decisions can undermine market confidence.

3. Need for Regulator Transparency:

• RBI and regulators must disclose rationales behind key decisions on management appointments and oversight actions to avoid speculation and mistrust.

The IndusInd Bank episode underlines the critical need for stronger internal governance, audit oversight, and proactive regulatory transparency. In a trust-based business like banking, both board-level governance and regulator decision clarity are vital to maintaining market confidence and financial stability.