IndusInd Bank shares are set to remain in focus on Tuesday after the private lender disclosed a potential ₹1,577 crore impact on its net worth, raising concerns about its financial stability and internal governance. The revelation has added to the pressure on the bank’s stock, which has already been on a steep downward trajectory, losing over 37% in the past six months. In just the last four weeks alone, the stock has declined by 16%, and on Monday, it fell nearly 4% to ₹900.50 on the NSE. Given the severity of the issue and the ongoing external review, heightened volatility in the stock is expected in the coming sessions.
The issue at hand stems from discrepancies in account balances related to the bank’s derivative transactions, which were discovered during an internal review. In a regulatory filing dated March 10, IndusInd Bank explained that these inconsistencies came to light following the implementation of the RBI’s Master Direction on the classification, valuation, and operation of investment portfolios for commercial banks, which took effect on April 1, 2024. The bank estimates that the financial impact of these discrepancies will result in a hit of approximately 2.35% to its net worth as of December 2024.
To ensure that its findings are accurate and transparent, IndusInd Bank has appointed an independent external agency to conduct a thorough review of the situation. The bank has assured stakeholders that it is fully committed to rectifying the issue and will make any necessary adjustments to its financial statements once the external audit is completed. The final report from the external review is expected by the end of March 2024. Despite the significant financial impact, the bank has reassured investors that its overall profitability and capital adequacy remain robust enough to absorb the one-time loss.
Impact on Financial Statements and Stock Performance
The estimated ₹1,577 crore hit is expected to be reflected in the bank’s financial statements for the fourth quarter of FY24. A key detail that has raised eyebrows is that these discrepancies in derivative transactions are not recent but have accumulated over a period of five to seven years. This revelation has led to growing concerns over the bank’s internal controls, risk management frameworks, and overall financial transparency.
Following the disclosure, IndusInd Bank conducted an analyst call where it provided additional details about the issue. The bank confirmed that the external auditor’s report is currently in progress, and once finalized, it will help determine the next course of action. The banking sector and investors are now awaiting further clarity on the matter before drawing definitive conclusions about the bank’s long-term stability.
Adding to the uncertainty is the leadership situation at IndusInd Bank. CEO Sumant Kathpalia, whose term was recently extended by just one year instead of the three-year tenure requested by the bank, acknowledged that the RBI may have had reservations about his leadership. He admitted that the bank began reviewing its internal trade book between September and October 2023, during which the discrepancies were first identified. To address the issue proactively, the bank engaged an external agency for an independent assessment and has been in regular communication with the RBI regarding its findings.
Leadership Concerns and RBI’s Short Tenure Extension for CEO Kathpalia
The RBI’s decision to extend Kathpalia’s tenure by only one year has fueled speculation about leadership instability at IndusInd Bank. Market analysts and investors view this short extension as an indication that the RBI may have deeper concerns about the bank’s governance, risk management, and leadership structure. This is not the first time that uncertainty over Kathpalia’s tenure has impacted market sentiment. In 2023, when his extension was limited to two years instead of the standard full term, similar concerns were raised, leading to stock volatility.
Some experts believe that unless IndusInd Bank appoints a CEO with a stable, long-term tenure, the stock will continue to face downward pressure. "The stock is unlikely to see any rerating until a CEO with a three-year term is appointed," said Pranav Gundlapalle, head of India financials at Bernstein.
Macquarie Capital, in its research report, suggested that Kathpalia might opt to step down earlier than expected due to the short extension granted by the RBI. The firm also speculated that IndusInd Bank might consider hiring a public sector banker to replace him. "The IndusInd Bank CEO may decide to retire early given the sub-optimal tenure approval, or a new CEO could be appointed after his one-year term, possibly a PSU banker," said Macquarie Capital’s associate director, Suresh Ganapathy.
Investor Sentiment and Outlook
The combination of financial discrepancies, leadership uncertainty, and regulatory scrutiny has put IndusInd Bank in a challenging position. While the bank has attempted to reassure investors that its financial fundamentals remain strong, the market reaction to its latest disclosure indicates growing concerns about corporate governance, internal risk management, and long-term leadership stability.
Going forward, the stock’s performance will likely be influenced by three critical factors:
- The outcome of the External Audit – Investors will closely monitor the findings of the independent review to assess the full extent of the financial discrepancies and whether they point to broader governance issues.
- CEO Succession Plans – Any announcements regarding leadership changes, including the possibility of an early departure by Kathpalia or the appointment of a new CEO, could significantly impact investor confidence.
- Regulatory and Market Response – If the RBI raises further concerns or imposes additional regulatory measures on the bank, it could lead to further declines in the stock and raise red flags about its operational stability.
With the financial impact set to materialize in Q4 FY24 earnings, investors remain cautious. Given the potential implications for governance and leadership, the stock’s recovery may take time, and near-term volatility is expected to persist. IndusInd Bank now faces the critical task of rebuilding investor confidence while addressing both regulatory and operational concerns in the coming months.
