IndusInd Bank has recently faced a significant setback due to an unexpected "accounting discrepancy" linked to its forex hedges, which has dramatically impacted its stock performance. Investors have reacted swiftly, with the bank’s stock plummeting 27% in just one day, specifically on March 11, 2025. While depositors don’t need to panic at this time, the situation raises eyebrows among investors.

Understanding the Accounting Discrepancy

The core issue revolves around an accounting error tied to foreign exchange hedges, rather than any mismanagement of loans or fraudulent activities. This mishap led to a staggering ₹1,500 crore reduction in IndusInd Bank’s profits for the fourth quarter of FY24, amounting to about 2.3% of the bank’s total net worth.

The Bank’s NRI Deposit Strategy

IndusInd Bank had previously focused on attracting Non-Resident Indian (NRI) deposits, offering competitive interest rates to draw in foreign currency. By the end of the third quarter of FY25, the bank had amassed an impressive ₹58,600 crore in NRI deposits, which constituted approximately 14.3% of its total deposits valued at ₹4.09 lakh crore. On the surface, this strategy appeared sound, as NRI deposits provide a stable source of funding without the risks associated with corporate deposits. However, the internal hedging strategies to manage forex risks turned out to be more intricate than anticipated.

The Mechanics of the Issue

Let’s break it down. When an NRI deposits $1 million into an NRE account, the bank converts this into Indian Rupees at the current exchange rate (for example, ₹86 per dollar), resulting in a total of ₹8.6 crore. The bank can utilize these funds for lending or other business activities. However, when the deposit matures, the bank must return the amount in dollars, and any fluctuations in the exchange rate could lead to significant losses.

Risk Management Through Hedging

To mitigate this risk, IndusInd Bank’s Asset Liability Management (ALM) Desk transfers the dollar liability to the Trading Desk via an internal derivative trade. While the ALM Desk uses the ₹8.6 crore for operational purposes, the Trading Desk assumes the obligation to repay in dollars after five years. To hedge against currency fluctuations, the Trading Desk typically enters a currency swap contract with a global bank.

Ideally, these internal and external hedges should counterbalance each other. Unfortunately, discrepancies arose because the internal trades were only intended for low-liquidity scenarios, leading to misalignments in their valuations throughout the contract period.

The Ripple Effect of Disclosure

On March 10, 2025, IndusInd Bank disclosed this accounting issue, prompting speculation about whether the Reserve Bank of India (RBI) had influenced this decision. This disclosure came shortly after the RBI extended the bank CEO’s tenure by only one year instead of the requested three years, raising questions about the bank’s governance and transparency.

Additionally, new regulatory guidelines regarding the classification and valuation of banks’ investment portfolios prompted an internal review, which likely uncovered the accounting discrepancies.

Stakeholder Concerns

Despite the troubling revelations, there is currently no reason for depositors to be alarmed. However, investors are left with several pressing questions:

• Is this a one-off incident, or are there deeper issues within the bank?
• Why are these forex-related losses unique to IndusInd Bank?
• Could the total losses increase after further external reviews?

Moreover, the bank’s recent operational issues, including mistakenly disbursing Micro Finance Institution loans to 84,000 customers, have raised concerns about its operational integrity and public trust—an essential aspect for any financial institution.

Conclusion

IndusInd Bank’s recent challenges highlight the complexities of managing forex hedges and the importance of transparency in financial reporting. Moving forward, both depositors and investors will be keenly watching how the bank addresses these issues and what measures are taken to restore confidence among stakeholders.

For further insights into banking trends and investment strategies, explore KPMG’s financial analysis and stay updated on market developments.