IndusInd Bank's Derivative Debacle: Unraveling the Rs 1,577 Crore Conundrum with Big-4 Consultants

IndusInd Bank, one of India's prominent private sector lenders, has been grappling with a financial storm following discrepancies in its Forex derivatives portfolio. The bank's efforts to rectify these issues involved bringing in big-four consultants, KPMG and EY, to review its treasury policies prior to the revelation of a Rs 1,577 crore loss. This article delves into the crisis, exploring how these consulting giants were involved, the impact of the accounting discrepancies, and the broader implications for the Indian banking sector.

Introduction to the Crisis

In March 2025, IndusInd Bank reported discrepancies in the accounting of its Forex derivatives, which led to a significant loss. This revelation sparked a sharp decline in the bank's stock price, further exacerbating concerns about financial governance and risk management within the Indian banking system. The crisis began to unfold in early 2024, when KPMG and EY were enlisted to review the bank's treasury operations and derivatives accounting practices.

Role of KPMG and EY

KPMG and EY played pivotal roles in assessing IndusInd Bank's financial strategies before the crisis became public. As part of their engagement, KPMG reviewed the derivatives accounting policy and assisted in implementing a new framework in line with the Institute of Chartered Accountants of India (ICAI) guidelines. Meanwhile, EY worked with the internal audit division to evaluate the treasury unit's operational and regulatory risks, identifying gaps in existing controls and governance mechanisms.

The comprehensive review involved a detailed analysis of products in foreign exchange, derivatives, and exchange-traded derivatives. Bank officials directed the consultants on process documentation and testing to ensure a thorough examination of the treasury operations. By July 2024, the internal audit team, assisted by EY, had shared their findings with the finance department, compliance officials, and the treasury team.

Accounting Discrepancies and Financial Impact

The turmoil at IndusInd Bank centers around discrepancies in the accounting of its Forex derivatives portfolio. The bank's initial internal review suggested an adverse impact of approximately 2.35% on its net worth as of December 2024. Following this, the bank appointed PwC to conduct an independent review of the derivatives portfolio accounting. The appointment of Grant Thornton Bharat for a forensic audit further underscores the seriousness of the situation.

The financial repercussions were substantial, with the bank reporting a post-tax impact of about Rs 1,577 crore. This figure equates to a significant portion of the bank's net worth, sparking investor unease and a dramatic decline in stock prices.

Dual Accounting Practices: A Root Cause

At the heart of IndusInd's crisis lies a dual accounting approach for its derivatives transactions. The Treasury Desk used mark-to-market (MTM) accounting, reflecting immediate gains and losses. In contrast, the Liability Desk employed accrual accounting, deferring losses over multiple years. This dual approach masked potential losses, artificially boosting short-term profits while delaying the recognition of actual losses.

The RBI's circular requiring all derivatives to be marked to market starting from April 1, 2024, exposed these deferred losses. The sudden need to value assets at current market prices revealed over Rs 1,500 crore in accumulated losses, which had been hidden by the bank's earlier accounting practices.

Governance, Transparency, and Regulatory Oversight

The IndusInd Bank debacle raises critical questions about governance and transparency in financial reporting. The crisis highlights the need for robust internal controls and consistent accounting practices across departments. Industry experts emphasize the importance of strong governance in maintaining investor trust and ensuring the integrity of financial statements.

The sudden departure of IndusInd Bank's CFO, Gobind Jain, added to the challenges, fuelling concerns about internal controls and financial reporting integrity. Regulatory scrutiny, including the RBI's industry-wide review of derivative positions, underscores the gravity of the situation and the potential for broader systemic risks.

Implications for the Indian Banking Sector

While the RBI has assured that the banking system is robust and secure, the IndusInd Bank crisis has significant implications for the sector:

• Systemic Risk Concerns: The possibility of similar accounting discrepancies in other banks could lead to a sector-wide crisis, affecting financial stability and confidence.
• Regulatory Actions: The RBI may impose stricter regulations, potentially increasing capital requirements and provisions, which could impact bank profitability and lending practices.
• Investor Confidence: A loss of investor confidence could lead to increased borrowing costs, reduced credit expansion, and challenges for businesses reliant on foreign currency loans.

In response to these concerns, experts advocate for enhanced governance, risk management, and regulatory vigilance to prevent such episodes from escalating into systemic crises.

Conclusion

The IndusInd Bank crisis serves as a stark reminder of the importance of robust financial governance and accounting practices within the banking sector. As the Indian financial landscape continues to evolve, the roles of KPMG and EY in reviewing and refining treasury policies illustrate the need for rigorous oversight and compliance with regulatory norms. The forthcoming forensic audit and external reviews will provide further clarity on the extent and impact of the accounting discrepancies, guiding both regulatory responses and industry-wide reforms to strengthen financial resilience.

For investors and stakeholders, the IndusInd Bank episode underscores the imperative of seeking transparency and accountability in financial reporting. As the RBI and other regulatory bodies work to minimize the occurrence and impact of such incidents, the broader implications for financial stability and economic growth remain a critical focus area.

In an environment where risk management and governance are increasingly paramount, the lessons from IndusInd Bank's experience will inform how institutions navigate complex financial landscapes, ensuring resilience in the face of regulatory changes and market fluctuations.