IndusInd Bank - Fraud by a few employees or failure of Corporate Governance?
And is IndusInd Bank an exception in these issues or there are many?
IndusInd Bank in its results for Q4 FY25 announced a profit drop of 71% for FY 25 and loss in Q4 FY 25, due to “likely fraud” by few employees with respect to “accounting irregularities”. The key disclosures were:
a) Internal Trades Derivative Accounting under the head "Other Assets' amounting to INR 1,959.98 crores being accumulated notional profits since FY 2015-16 have been written off as a prior period item in the current financial year. - FY 16 to FY 24
b) Incorrect accounting and subsequent reversal of cumulative interest income of INR 673.82 crore and Fee income of INR 172.58 crores within the current financial year. - Clearly over long term
c) Certain incorrect manual entries posted in the "Other Assets" and "Other Liabilities" pertaining to prior years amounting to INR 595 crores has been set off during the current financial year. Were they linked to the other discrepancies?
d) Wrong classification of certain loan accounts as Standard Assets and income accrued on them. The corrected classification of the same resulted in additional Rs 1885 crore assets as NPAs and reversal of Rs 180 crore as income. The Bank also had to provide 95% for the NPAs. No disclosure of how many years this was happening and how was a defaulting loans of such magnitude (Over 3 lac borrowers) classified as standard?
e) Interest payment of Rs 99 crore on some borrowing instruments not recognised as expenses in P&L in earlier years.
f) Prior period expenses (Rs 206 crore) and Income (Rs 126 crore) required rectification.
g) An additional provision of Rs 133 crore for Other Assets, that are not expected to be realised. Over how many years was this discrepancy?
In total 7 disclosures have been made by the Bank in Q4 FY 25, with respect to financial irregularities. Most of these irregularities seemingly have one end objective -either inflating income and deflating expenses. And each of these “7”, pertain to many years in the past and not just FY25. The total impact of the above on the P&L of IndusInd Bank is over Rs 5000 crore. And the Chairman of the Bank has said, that they were unaware of the issues till March 2025!
Under Corporate Governance norms for a Bank, there are 6 lines of defense with respect to preventing such incidents from happening in order of hierarchy -
Management & Systems and Processes
Internal Audit
Risk Management team
Committees of the Board
Statutory Auditors
RBI supervision of the Bank
The key questions that arise are:
How were these missed out by the each of the above hierarchy of checks and balances?
How come “suddenly” in Q4 FY25 each of the lines of defense discover the issues of many years in the past?
The private lender's board says it is in the process of taking necessary steps to assess roles and responsibilities and fix staff accountability as per the extant laws and internal code of conduct in all the identified irregularities.
A brief understanding of the Lines of defense and the issues they “failed” to highlight:
Management has obviously failed with the resignation of CEO and Dy CEO. Since some of the irregularities are over number of years, should there be accountability of the previous CEO who superannuated in 2020? Is it just “moral” responsibility of the Management as mentioned by CEO in his resignation letter?
On 28th May, Sebi has issued an interim order against five senior executives of IndusInd Bank, including its former CEO, for alleged insider trading. These individuals are accused of selling shares while possessing UPSI related to discrepancies in the bank's derivative portfolio. The list includes a current member of the Committee of Executives, entrusted to oversee the operations of the bank!
Internal Audit - Independence of Internal Audit is the foundation of Corporate Governance. In this instance, suddenly the IA has identified some of the issues in Q4 FY 25 pertaining to many years. IA head reports functionally to Chair Audit committee and Administratively to CEO/CXO. How many IAs are “truly” independent? And in many cases, the IA is “outsourced” to an external firm and companies view this as “cost” and not a critical link for strengthening Internal controls
And a Bank also has mandatory concurrent audit. And yet…
The Audit committee of IndusInd Bank has senior CAs as Chair and members. The Audit committee met 25 times in FY23-24. And yet all of the above was “missed”? Is the Audit committee accountable?
Audit committee includes a current Senior Partner at KPMG India. And “coincidentally” the firm appointed to investigate the forex derivative issue was also KPMG in December 2024!. Is it possible that this appointment was without the knowledge of Audit Committee and/or the concerned member? And as a corollary, does it not indicate that the Audit committee knew of the forex irregularity at least 3 months before the official announcement in March 2025 and not later as claimed by the Chairman?
What about conflict of interest of KPMG - Well, that is for another day!
Statutory Auditors - As per RBI guidelines there are 2 statutory Auditors for every Bank Audit. In this instance for Q4 FY 25, the Auditors have cried “wolf” and said there is a fraud. But in 23-24 - During the year under review, pursuant to Section 143(12) of the Act, neither the statutory auditors nor the secretarial auditor of the Bank have identified any instances of frauds committed in the Bank by its officers or its employees.
In 24-25, one of the statutory auditor was newly appointed. Did this aid in this discoveries of irregularities?
The total Audit fees paid by IndusInd Bank in 23-24 was Rs 3.74 crore. This translates to 0.0068% of total revenues of IndusInd Bank and 0.04% of the Net Profits for the year
And of course the time pressure to complete the Audit ASAP
Is it realistically possible for the Audit firm to “do a thorough due diligence by its best people in the Audit with both cost and time pressure?
Can IA, Risk and Statutory Auditors miss over 3 lac accounts in one product category alone, not being classified as NPA for long time?
RBI had conducted supervisory inspection of IndusInd Bank for FY23 and based in the same, in Dec 2024, imposed a monetary penalty of ₹27.30 lakh “pertaining to opening of certain savings deposit accounts in the name of ineligible entities”. RBI inspection identified a “micro issue” but it seemingly failed to identify the 7 larger issues highlighted earlier?
Did RBI know of some of these earlier? RBI had declined a 3 year renewal for the current CEO and restricted it to 1 year despite Board recommending 3 year tenure? And strangely, this 1 year extension was announced in March 2025, when some of the irregularities were in public domain!
The Board has in its statement said that it will fix staff accountability as per the extant laws. What about its own Accountability? The AR says “Annual Performance Evaluation exercise for FY 2023-24 had been carried out by engagement of an external professional agency, which is specialised in Board evaluation processes”. Can the Board say with a straight face, “these were happening for several years, but we were not informed and yet the Board did a great job?
What does all of the above hint at?
The incidents over number of years have been “missed” out by several lines of defense at a large Private Bank with an Independent Board (Promoters have only 15% stake in the Bank). Is it really possible, that a few rogue employees only were responsible?
Are there more “incidents/irregularities” which will be disclosed later as the Board says, we are cleaning up?
Board says - “There is nothing that is outstanding today to our understanding. And if there is any issue, they must be surfaced expeditiously so that the same can be addressed”!
Or they were not disclosed with possibly “implicit” nudge from regulator to prevent a possible impact on the financial system similar to Yes Bank incident?
The Chairman says “as far as the entire process of accountability is concerned, we will follow without fear and favor the due process of law. And whatever action that needs to be taken, will be undertaken based on whatever is required to be done as per law, by ensuring that we do it expeditiously.” Will it include accountability at Board level and External entities?
Is it likely that some other Banks in India possibly have “similar irregularities” missed out by several lines of defense amidst host of entities certifying “ALL IS WELL”
If all of this can happen at a highly regulated entity(viz. Bank), what about other Industries where regulations are relatively less stringent?
Is there a need to reconsider Statutory Auditors - Responsibilities, Remuneration and Accountability to ensure they go hand in hand?
The Independence of Internal Audit /Risk is established in “letter”, but are they “Independent” in spirit?
Is there a need for a “comprehensive” relook at “Corporate Governance” procedures in India? Or the total value quantum of the “incidents” is very small and “not material” enough to warrant any cause for concern?
Well we will know in due course.
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