Context:
Moody’s has initiated a review of IndusInd Bank’s risk management capabilities and its ongoing leadership transition, following revelations of accounting lapses concerning derivatives transactions.
Key Highlights:
- Risk Management Focus:
- Moody’s is primarily focused on evaluating the bank’s risk management capabilities amid these issues.
- Financial Impact:
- Despite the identified issues, the financial impact of the derivatives losses is considered manageable, supported by IndusInd Bank’s strong capital position.
- Discrepancies in Derivatives Transactions:
- An external agency’s report highlighted discrepancies in derivatives deals, estimating a negative financial impact of ₹1,979 crore as of June 30, 2024.
- Credit Rating and Outlook:
- Moody’s placed the baseline credit assessment (BCA) for the bank on review for downgrade in March 2025, citing inadequate internal controls in accounting for these transactions. However, the outlook on IndusInd Bank’s long-term ratings remains stable. The bank’s current long-term credit rating stands at “Ba1” for foreign currency (FC) and local currency (LC) deposits.
Yes Bank: Profitability Concerns
Moody’s also discussed Yes Bank, noting the bank’s progress in cleaning up its books but highlighting ongoing concerns about its low profitability.
- Profitability Comparison: Yes Bank’s Return on Assets (RoA) stands at approximately 70 basis points, significantly lower than the 1.5% RoA observed in comparable private sector banks.
- External Capital Needs: The bank’s profitability is linked to its ability to raise external capital, which will be crucial for future financial health.
- Rehabilitation and Outlook: After a default event, Yes Bank underwent rehabilitation and attracted new shareholders. In July 2024, Moody’s revised its outlook on Yes Bank from stable to positive, anticipating gradual improvements in the bank’s depositor base and lending franchise.
India’s Banking System Outlook
Despite challenges faced by individual banks, Moody’s maintains a stable outlook for India’s banking system. Key drivers for this stability include:
- Government capital expenditure
- Tax cuts
- Monetary easing which could stimulate consumption
