IndusInd accounting mismatch: SEBI's response vastly better than RBI's

India’s fifth-largest private bank, IndusInd Bank, has been hit by a major accounting issue related to forward contracts on Foreign Currency Non-Resident (FCNR) deposits.

Earlier this month, the lender informed its shareholders that an internal review of forex derivative transactions had unearthed an accounting mismatch worth ₹1,577 crore (post-tax), which is about 2.35 per cent of its net worth at the end of December 2024.

It appears that for the past many quarters, the bank had reported excess profits, thanks to the accounting discrepancy. The day after its disclosure, the bank's share price crashed 27.17 per cent on the BSE, recording its biggest one-day fall since listing. The stock has, in fact, lost nearly 54 per cent in the past six months — an unusually steep fall for a NIFTY company.

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What's strange is that the Reserve Bank of India (RBI) has come out with a clarificatory statement claiming all is well at IndusInd Bank. This is in direct contrast to the reaction of the Securities and Exchange Board of India (SEBI), which appears to be investigating possible insider trading among senior bank officials.

RBI’s press release

The RBI came out with a press release acknowledging that there has been some speculation over IndusInd Bank. However, the bank is well-capitalised and its financial position remains satisfactory, it said.

Further, it said, per the bank's auditor-reviewed financial results for the quarter ended December 31, 2024, IndusInd Bank has maintained a comfortable capital adequacy ratio (CAR) of 16.46 per cent and provision coverage ratio (PCR) of 70.20 per cent.

Also, its liquidity coverage ratio (LCR) was at 113 per cent as on March 9, 2025, against the regulatory requirement of 100 per cent.

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The RBI also said the bank has already engaged an external audit team to comprehensively review its current systems, and to assess and account for the actual impact expeditiously.

SEBI’s probe

A news report said SEBI, India's markets regulator, is probing into what could be insider trading among senior IndusInd Bank officials.

It has sought information about trades executed by five senior officials while they were in possession of unpublished price-sensitive information of IndusInd, said the report. The SEBI is also examining whether IndusInd Bank violated disclosure norms.

The RBI, meanwhile, has directed the bank board and management to have remedial action completed during the current quarter, viz, Q4 FY25, after making the required disclosures to all stakeholders.

It has also said there is no need for depositors to react to the speculative reports at this juncture, and that the bank’s financial health remains stable. It's closely monitoring the issue, said the central bank.

However, both depositors and investors are curious about some gaps in the disclosures made so far.

What's the issue?

Banks are permitted to take FCNR deposits from non-resident Indians (NRIs). The deposit is maintained in the designated foreign currency and, on the due date, it is paid back in the same currency or in any other permitted currency. The scheme aims to protect depositors from the depreciation of the rupee over time.

When it was introduced, the exchange loss was absorbed by the RBI. Subsequently, the scheme was modified and individual banks were mandated to absorb the exchange variation. To manage the risk of exchange variation, they were also mandated to take forward cover for the liability.

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FCNR deposits therefore have corresponding forward contracts to buy forex on the due date so that there would not be any exchange risk for the bank. For all FCNR deposits, the forward cover should have been taken by the bank. This should have been duly certified by the concurrent auditors on a periodic basis apart from regular auditors for annual closing of accounts.

What went wrong

Then, how can there be some discrepancy reported now?

There seems to be something fundamentally wrong with the accounting system adopted by the bank and there seems to be a cover-up operation now, with the blessings of the banking regulator, the RBI. It can’t be taken just as an overstatement of profit.

Banks’ systems and procedures are well structured with the ‘maker-checker’ concept and there can’t be any gap as they are very robust.

As it is, no fraud has been reported so far on this. The RBI must ensure the disclosure of full facts to the public.

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Silence on CDR

While the RBI press release has discussed IndusInd Bank's CAR, PCR and LCR, it is silent on its credit-deposit ratio (CDR).

As of December 31, 2024, IndusInd Bank's CDR stood at 81.2 per cent, rising 66 basis points year-on-year, driven by deposit growth lagging credit offtake. This increase is attributed to a situation where deposit growth has been slower than the growth in credit offtake.

The CDR, a key indicator of a bank's financial health, shows the proportion of deposits used for lending.

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Warning signs

A high CDR indicates a bank has sanctioned a large amount of loans compared to its deposits, which can be seen as a sign of increased risk and reduced liquidity. It could mean a bank may have difficulty meeting its obligations. A high CDR also signals liquidity and credit risks for banks.

Banks are mandated to have a statutory liquidity ratio (SLR) of 18 per cent and cash reserve ratio (CRR) of 4 per cent out of deposits mobilised. Hence what is left for lending is only 78 per cent of deposits. If a bank is lending more than this, it means it is out of borrowings, which can’t be considered heathy.

Let us not forget that in earlier years, institutions like Lakshmi Vilas Bank and Yes Bank had high CDRs and they later had to be saved through enormous efforts taken by the RBI and the Centre.

While SEBI seems to be on track in unearthing the truth, the action of RBI seems to be lacking. One expects better disclosure from the concerned bank and the banking regulator.