IndusInd Bank’s ₹1,500 Crore Forex Loss: What Went Wrong?

IndusInd Bank has found itself in trouble due to an “accounting discrepancy” in its forex hedging strategy, which has caused its stock to drop by 27% on March 11, 2025. While this issue does not pose an immediate risk to depositors, it raises concerns among investors about the bank’s financial management.

The NRI Deposit Strategy: A Risky Bet

IndusInd Bank aggressively pursued NRI deposits, offering attractive interest rates to attract foreign currency inflows. By Q3 FY25, it had ₹58,600 crore in NRI deposits, making up 14.3% of its total deposits of ₹4.09 lakh crore.

On the surface, this seemed like a smart move, as NRI deposits provide stable, long-term liquidity. However, the bank relied on complex hedging mechanisms to manage foreign exchange risk, and an accounting mismatch led to an unexpected ₹1,500 crore loss in Q4 FY24—about 2.3% of its total net worth.

How Did the Loss Happen?

When an NRI deposits $1 million, the bank converts it into rupees—let’s say at ₹86 per USD, giving ₹8.6 crore. The bank can then lend or invest this amount. However, when the deposit matures, it must be returned in dollars. If the exchange rate changes significantly, the bank could suffer losses.

To manage this risk, the bank’s Asset-Liability Management (ALM) Desk shifts the liability to the Trading Desk through an internal derivative trade. The Trading Desk, in turn, hedges this externally using currency swaps with global banks to lock in exchange rates.

In theory, these hedges should cancel each other out. However, IndusInd Bank used different valuation methods:

• The external hedge was marked to market (MTM)—valued daily at fair market prices.
• The internal hedge followed swap cost accounting, causing a mismatch in valuations.

The problem arose when the bank repaid some foreign borrowings earlier than expected, forcing it to unwind the internal trades. This exposed the accounting gap, leading to a loss that had been incorrectly recorded as “intangible assets” instead of being provided for.

Did the RBI Push for Disclosure?

IndusInd Bank’s CEO, Sumant Kathpalia, stated in an analyst call that the bank chose to disclose the issue promptly rather than waiting for further validation. However, there are indications that the RBI may have nudged the bank into revealing the losses.

• The disclosure came just 3 days after the RBI extended the CEO’s tenure by only 1 year instead of the requested three years.
• New RBI regulations on investment portfolio classification, valuation, and operations, effective April 2024, required banks to review their derivative positions. Most banks disclosed their impact by June 2024, but IndusInd Bank delayed it until March 2025.

What’s Next for Investors?

While this is not a case of fraud or bad loans, the incident raises several concerns:

• Why did this happen to IndusInd Bank alone and not other banks with forex hedges?
• Could the final loss amount increase after an external review?
• Does this reflect broader operational issues, given IndusInd’s past errors, such as mistakenly disbursing loans to 84,000 borrowers?

For investors, these questions create uncertainty, shaking confidence in the bank’s governance and risk management. Ultimately, trust is the most valuable currency a bank holds, and IndusInd now faces the challenge of restoring it.

About IndusInd Bank Limited

IndusInd Bank Limited was established in 1994 as a commercial bank under the Banking Regulation Act, 1949. It is a publicly listed bank offering a diverse range of banking products and financial services to both corporate and retail customers, along with treasury operations. The bank operates across India, including in International Financial Service Centres (IFSCs).

As of March 13, 2025, at 9:35 AM IST, IndusInd Bank share price is trading at ₹693.85, up ₹9.15 (1.34%) for the day. The stock opened at ₹690.00, reached a high of ₹706.90, and hit a low of ₹689.00. The bank’s market capitalisation stands at ₹53,950 crore, with a P/E ratio of 7.46 and a dividend yield of 2.38%. Over the past 52 weeks, the stock has touched a high of ₹1,576.35 and a low of ₹606.00.

Conclusion

IndusInd Bank’s forex hedging loss, while not fraudulent, highlights accounting lapses that have shaken investor confidence. The bank must now focus on transparency and stronger risk controls to regain trust.

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