Mudra Compass

A storm is brewing in India’s private banking sector, and IndusInd Bank finds itself at the centre of it. The lender recently disclosed a massive ₹2,000 crore loss linked to foreign exchange (forex) derivatives, raising critical questions about internal controls, transparency, and possibly, fraud. What began as a self-reported “discrepancy” in accounting is now under deeper scrutiny as auditors, regulators, and stakeholders examine whether this was merely a technical error—or something far more serious.

The controversy is not just about the numbers. With senior management resigning and credit ratings downgraded, the unfolding situation could set a precedent for how Indian banks report and manage derivative exposures, and more importantly, how they classify irregularities that impact investor trust.

What Went Wrong: The Crux of the Derivative Loss

IndusInd Bank, one of India’s top private sector banks with a balance sheet of over $63 billion, shocked markets in March 2025 when it reported that its derivatives portfolio had been overvalued by around 2.35%. This miscalculation translated into a loss of ₹2,000 crore—an amount significant enough to trigger a closer look by statutory auditors and regulators.

At the heart of the issue is a mismatch in accounting methods. Internally, the bank used accrual accounting for forex transactions involving its own desks dealing in dollar and yen deposits. However, external transactions with other banks were marked to market—a method that reflects real-time changes in value. This inconsistency led to an inflated profit figure in previous years, while losses were deferred, only to come crashing into the books now.

Is It an Error, Discrepancy, or Fraud?

Initially, IndusInd Bank termed the issue a “discrepancy” in its disclosures to stock exchanges and credit rating agencies. However, this language may no longer suffice. According to a report, statutory auditors are now evaluating whether the losses qualify as an accounting error, a reporting discrepancy, or an outright fraud.

This is more than a matter of semantics. Under the Companies Act, 2013, any fraud involving over ₹1 crore must be reported by statutory auditors to the central government. If declared a fraud, it would compel the bank to formally disclose the findings to the Ministry of Corporate Affairs, possibly leading to regulatory and even criminal proceedings.

Further complicating matters, a forensic audit by Grant Thornton revealed that senior executives—CEO and Deputy CEO—allegedly sold shares while being aware of the accounting lapses, before public disclosure. This raises potential insider trading concerns. Both executives have since resigned, citing moral responsibility, but the timing and circumstances are likely to draw attention from regulatory bodies like SEBI and the RBI.

Auditors, Oversight, and Accountability

The burden of clarity now lies with the bank’s board of directors. They are expected to assess the findings and determine how the issue will be classified in the bank’s 2024–25 annual report. The decision carries weight—not just for reputational reasons, but also for compliance with disclosure norms under Indian corporate law.

Moody’s, the global credit rating agency, has already downgraded IndusInd’s standalone financial profile, citing weak internal controls and inadequate managerial oversight. The RBI, too, has stepped in by approving an interim committee to oversee daily operations and stabilise governance structures.

Implications for the Banking Industry

The IndusInd case could set a critical precedent. Indian banks are required to report confirmed cases of fraud through the Fraud Monitoring Return (FMR) system to the RBI. The central bank defines fraud broadly—encompassing misappropriation, misrepresentation, falsification of records, and irregular forex transactions. If this case is classified as fraud, it could usher in tighter oversight and stricter compliance for forex and derivative operations across the banking industry.

Moreover, with Indian banks increasingly engaging in complex financial instruments, the case highlights the urgent need for robust risk assessment frameworks and real-time audit capabilities. It also underscores the importance of ethical conduct at the top management level—especially in publicly listed institutions where shareholder trust is paramount.

What It Means for Investors and Customers

For retail investors and account holders, the incident is a wake-up call. While banks are heavily regulated in India, governance lapses—even rare ones—can impact shareholder value and the bank’s credibility. Investors should watch for how the bank handles the upcoming annual disclosures and whether it takes meaningful corrective steps.

Credit rating agencies, institutional investors, and even retail shareholders will be closely watching whether IndusInd’s leadership demonstrates transparency and accountability. A proactive approach in addressing governance issues may help rebuild trust, but silence or vagueness could deepen scepticism.

Conclusion

Whether the ₹2,000 crore loss at IndusInd Bank ends up being classified as a discrepancy, an error, or a fraud, the implications are far-reaching. This incident not only raises red flags about risk management and internal controls but also forces a larger conversation about transparency and ethical leadership in India’s financial sector.

As regulatory scrutiny intensifies and the board prepares to finalise the annual accounts, how the bank responds in the coming weeks will determine its long-term credibility. For now, investors, regulators, and customers are watching—and they will not settle for vague reassurances.