RBI’s next big test: Will IndusInd Bank’s crisis trigger a massive banking sector shake-up?

IndusInd Bank, one of India’s most prominent private sector banks, is in soup, and the present ongoing controversy has significantly impacted its financial standing and market perception. The bank’s troubles have reignited concerns about transparency and governance within the Indian banking sector.

An internal review at the bank uncovered substantial accounting mismatches in IndusInd’s foreign exchange derivatives transactions, leading to an estimated post-tax impact of ₹1,577 crore, approximately 2.35% of its net worth as of December 2024.

This discrepancy arose from underestimating hedging costs related to past forex dealings, prompting the bank to appoint an external agency for an independent assessment.

Following the revelation of the accounting issues, IndusInd Bank’s shares dropped by 27.2% on Tuesday, closing at Rs 655.95. This marked the steepest one-day decline since the bank’s listing and positioned the shares 58.38% below their 52-week high of Rs 1,576.00, reached on 8 April.

Further, the sudden departure of CFO Gobind Jain just before the announcement of the December quarter results has added to the bank’s challenges. This unexpected resignation has further fuelled concerns regarding the bank’s internal controls and financial reporting integrity.

Collectively, these issues have severely dented investor confidence, leading to a sharp decline in the bank’s market valuation. The accounting discrepancies have not only impacted the bank’s financial metrics but have also drawn regulatory scrutiny, with the Reserve Bank of India (RBI) initiating an industry-wide review of derivative positions.

Financial experts warn that if a crisis of this nature were to spread across multiple banks, including public sector banks (PSUs), the consequences could be severe.

Certified Financial Planner Yogita Dand outlined the potential fallout: “If a crisis like the IndusInd Bank turmoil hits multiple banks, including PSUs, it could create serious financial instability. Banks may face liquidity issues, leading to panic withdrawals, a stock market slump, and a slowdown in economic growth.”

The scenario is stark: The Reserve Bank of India and government would likely need to step in with bailouts and emergency measures, but this would put pressure on public finances.

“Investor confidence would drop, affecting India’s credit rating and foreign investments. Businesses, especially MSMEs, could struggle due to reduced access to loans. To prevent such risks, stronger governance, better risk controls, and stricter regulations are essential,” added Dand.

Adding to the concerns, Prashant Mishra, Founder and CEO of Agnam Advisors, pointed out that an RBI probe into unhedged forex liabilities might reveal that the issue extends beyond IndusInd Bank.

“The Indian banking sector may face tighter regulations, enhanced capital requirements, and provisioning costs, affecting profitability,” added Mishra.

This way, banks may become risk-averse and tighten their lending standards for corporate borrowers, particularly the ones relying heavily on foreign currency loans.

“Borrowing costs would increase, credit expansion would slow down, and businesses would need to restructure debt or delay expansion plans,” said Mishra.

Foreign investors may retaliate with capital flight, putting pressure on bank stocks and bond markets, and global rating agencies may downgrade the banks or the sovereign rating of India, raising the cost of borrowings for financial institutions and corporations.

“The rupee may experience heightened volatility, prompting RBI interventions, which may strain forex reserves and fuel inflationary pressures,” added Mishra. Thus, for the overall economy, a shortage of liquidity and rising risk premiums may erode business confidence and check GDP expansion.

According to Amit Suri, CFP® and Founder of AUM Wealth, the situation underscores the importance of strong governance in maintaining customer trust.

“It’s a situation that not only affects the reputation of IndusInd Bank but casts doubt on the broader Hinduja Group as well. As customers, we must remember to prioritise stability, transparency, and governance over simply chasing higher interest rates for fixed deposits.”