The Rise And Fall Of IndusInd Bank Share Price Has Lessons For Everyone

All these development have shaken the confidence of investors, while the bank’s reputation has taken a heavy beating. As an immediate step to stem the rot, RBI is checking the derivative transactions of all other banks

One of the top five private banks in the country, IndusInd Bank, in the wake of some recent developments, saw its share price dip to levels that were last seen in 2014.

It fell by 27 per cent on a particular day due to Forex derivatives transactions in which there was a major accounting discrepancy. Owing to wrong calculations over the past few years, and the accumulations thereof, the bank now stares at a loss of a staggering Rs. 1,577 crore (post tax) in its portfolio. (The amount of loss is estimated to be Rs. 2,100 crore pretax). It is about 2.35 per cent of the bank’s net worth at the end of December 2024, which is why investors have lost confidence in its shares. The prices have fallen from a peak of 1,500 to less than ½ of the peak price it commanded last year.

This crisis is not an unusual development, though. There have been precedents in the form of Yes Bank, Laxmi Vilas Bank, Diwan Housing Finance and PMC Bank that all resulted in losses for investors and, to some extent, even that of depositors. Each is attributed to accounting and corporate governing issues.

Talking to Bizz Buzz, Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors, says, “Banks usually engage in Forex derivatives to manage their risks associated with currency fluctuations. Proper accounting of these transactions is essential for accurate financial reporting. IndusInd Bank’s internal review indicates that over the past seven to eight years there were deficiencies in such transactions.”

The bank was overstating its profits and simultaneously its share prices. In the fourth quarter we expect that when all provisions are incorporated, the bank will go into a loss. LIC’s holding in IndusInd Bank was 5.23 per cent while it was valued at around Rs. 2,500 crore at Tuesday’s closing prices, Bhansali pointed out.

Meanwhile, the Reserve Bank of India (RBI) has asked IndusInd Bank to declare all its losses to its investors after the bank board decided to delay provisioning by a year. There has been an upheaval in the management of the bank. The CFO has already resigned, while the incumbent Managing Director and CEO has been given an extension of one year as against the normal trend of three years All these development have shaken the confidence of investors, while the bank’s reputation has taken a heavy beating.

As an immediate step to stem the rot, RBI is checking the derivative transactions of all other banks. The central bank has, in the meanwhile, maintained that IndusInd Bank is very well capitalised and its financial position is quite ‘satisfactory’.

The capital adequacy ratio of the bank as on December 2024 is 16.46 and the provision coverage ratio is 70.20 per cent. The Liquidity Coverage Rao of the bank is 113 as on March 9, which is much higher than the regulatory requirement of 100 per cent. The RBI has also asked the management to have the remedial action in place during the current quarter after making the required disclosures to all stakeholders.

IndusInd Bank has already engaged an external audit team to review its current systems and to assess and account for the actual impact of the accounting error expeditiously. It has asked depositors not to react to speculative reports given that its financial health remains stable and the RBI is closely monitoring the issue. The IndusInd Bank has disclosed that some discrepancies were found during an internal review of processes related to assets and liabilities accounts of its derivative portfolio on March 10.

The steps mooted by the RBI are completely aligned with the larger interests of the depositors, though the apprehension is whether the entire transition will be orderly.

M.V. Harihaan, former treasury head, State Bank of India, says, “The role of the CRO, ACB, and the Board of Directors is under the scanner. Hopefully, lessons are learnt and implementation of the remedial process is immediate.”

The role of the mid-office at the Treasury will hopefully be probed in depth as part of the RCA, he said.

IndusInd Bank has been facing issues with discrepancies in its accounting methods. The bank reported an inflated profit of Rs 2,100 crore over the past seven years. This issue was internally known since October 2024, around the same time their CFO resigned.

However, the bank only disclosed this information on March 11, leading to a sharp 27 per cent drop in its share prices.

The usual daily trading volume for IndusInd Bank stock is around 4.2 million shares. However, on February 28, it skyrocketed to 55 million shares!

Quite ironically, its stock price started declining precisely from that very day.