Intensified Investigation into IndusInd Bank’s Accounting Practices
Overview of the Investigation
The scrutiny surrounding IndusInd Bank regarding accounting irregularities has stepped up considerably. The Serious Fraud Investigation Office (SFIO), operating under the Ministry of Corporate Affairs (MCA), is intensively examining the bank’s financial practices. This week, SFIO officials engaged with senior bank representatives and are preparing to formally request detailed written clarifications concerning specific accounting anomalies identified previously.
Parallel Inquiries and Findings
As the SFIO ramps up its investigation, the Economic Offences Wing (EOW) of the Mumbai Police is nearing the conclusion of its preliminary probe. The EOW has found no conclusive evidence suggesting that funds were siphoned off or diverted for non-banking activities. Unlike the EOW’s focus on possible criminal misappropriation, the SFIO is concentrating on breaches of accounting standards, governance lapses, and violations of corporate law.
In a regulatory announcement, IndusInd Bank stated that it adhered to the Reserve Bank of India’s (RBI) Master Directions regarding Fraud Risk Management for Commercial Banks. As per these regulations, any fraud exceeding ₹1 crore must be reported not just to the RBI but also to the SFIO. The bank had preemptively informed the SFIO about existing accounting issues on June 2, 2025, which notably included concerns about internal derivative trades and discrepancies in recognizing interest and fee income within its microfinance operations.
MCA’s Directives for Investigation
Earlier reports indicated that the MCA had instructed the SFIO to undertake an investigation catalyzed by serious observations from statutory auditors and forensic audits. These documents raised significant public interest concerns, highlighting that certain accounting methods utilized by IndusInd Bank did not align with established accounting standards or regulatory guidelines. As the investigation unfolds, it remains crucial to monitor the implications for the bank’s ongoing credibility and operational integrity.
Financial Impact: Heavy Losses Posted
IndusInd Bank’s accounting irregularities significantly impacted its financial health. The bank reported a staggering net loss of ₹2,329 crore during the January to March quarter of FY25 (Q4FY25). This loss was predominantly attributed to a notable rise in provisions and reversals of income entries tied to derivatives and microfinance activities that were improperly recorded.
These corrections followed a thorough internal review, revealing that numerous income items were inaccurately recognized according to applicable accounting norms, creating an urgent need for rectification.
Derivatives Portfolio Issues
In March 2025, the bank acknowledged that ongoing internal reviews had revealed serious discrepancies in its derivatives portfolio. Consequently, IndusInd Bank engaged external agencies to conduct an in-depth forensic examination to ascertain the scope and root causes of these issues. The review revealed a history of multiple derivative transactions from FY16 to FY24, with their accounting treatments not adhering to prescribed standards. This led to significant amounts being recognized as notional income over several years, resulting in corresponding entries on the balance sheet.
In FY25 alone, the bank recorded a write-off of ₹1,959.98 crore in accumulated notional income linked to these transactions. Additionally, adjustments were made to rectify ₹595 crore of unsubstantiated balances categorized under “other assets” and “other liabilities.”
Irregularities in Microfinance Income Recognition
The forensic review also highlighted significant irregularities within the bank’s microfinance portfolio. It was determined that ₹673.82 crore of interest income and ₹172.58 crore in fee income had been incorrectly recognized. The reversal of these entries adversely affected the bank’s Q4FY25 performance by ₹422.56 crore.
Moreover, several microfinance loans were misclassified as standard assets, leading to continued interest income bookings. The bank subsequently recognized provisions amounting to 95% on these misclassified loans, totaling ₹1,791 crore. The combined impact of increased provisioning and income reversals had a substantial negative effect of nearly ₹1,969 crore on the profit and loss statement by March 31, 2025.
Management Reshuffle and Accountability Measures
Following these financial revelations, Sumant Kathpalia, the then Managing Director and CEO of IndusInd Bank, along with Deputy CEO Arun Khurana, resigned, taking accountability for the approximately ₹1,960 crore in losses associated with the derivatives portfolio. The current management is also exploring the possibility of clawing back bonuses awarded to former senior executives as part of their governance and accountability efforts, aiming to restore confidence among stakeholders and uphold corporate integrity.
