Error or fraud: IndusInd Bank pressured to explain ₹2k cr derivative loss

Auditors seek clarity on whether the ₹2,000 crore loss stems from fraud or accounting irregularity

Private sector lender IndusInd Bank is under mounting scrutiny over its accounting of foreign exchange derivative transactions. Statutory auditors have reportedly urged the bank to clarify whether the issue constitutes an accounting ‘discrepancy’, a technical ‘error’, or an outright ‘fraud’, according to a report by The Economic Times.

 

The bank’s auditors have been reportedly questioned if the losses linked to the derivatives misstatement, amounting to nearly ₹2,000 crore, fall under the definition of fraud.

 

IndusInd sticks to ‘discrepancies’

So far, IndusInd Bank has consistently referred to the issue as a ‘discrepancy’ in its communications  to stock exchanges and credit rating agencies. However, that language may now be insufficient, given the auditor’s legal responsibilities and the impact on investor and regulatory confidence.  The decision on terminology rests with the bank’s board of directors, led by Chairman Sunil Mehta, and its audit committee, chaired by Bhavna Doshi. Both bodies are expected to deliberate on the findings ahead of the bank’s annual accounts finalisation, which will reflect the full extent of losses from its forex derivative and microfinance businesses. 

 

What led to IndusInd Bank’s ₹2,000 cr derivative loss?

The discrepancy appears to have arisen from inconsistent accounting methods applied to internal and external foreign exchange transactions. While one part of the transaction — between internal desks dealing in dollar and yen deposits — followed accrual accounting, the other leg — conducted with external banks — used mark-to-market valuation. This mismatch reportedly resulted in overstated profits in previous years and a deferred recognition of valuation losses, which now total around ₹2,000 crore. 

 

What if it was ‘fraud’?

Under the Companies Act, 2013, statutory auditors are required to report fraud involving amounts exceeding ₹1 crore to the government. For lower amounts, the issue must still be reported to the company’s board or audit committee. With the scale of losses involved, a formal declaration of fraud would trigger regulatory disclosures and potentially further investigations.

 

Should the bank acknowledge the issue as a fraud, it would likely need to submit formal documentation to the Ministry of Corporate Affairs. The response of employees implicated in the forensic report prepared by Grant Thornton may influence how the bank ultimately characterises the issue in its 2024–25 annual report and the auditor’s report.

 

This case could set an industry precedent, especially as Indian banks are required to report confirmed instances of fraud through the Fraud Monitoring Return (FMR) to the Reserve Bank of India (RBI). The RBI’s definition of fraud includes financial deception, breaches of trust, irregular forex transactions, and falsification of records under penal provisions such as Section 477A. 

 

IndusInd Bank ₹2,000 crore derivative loss: What happened?

IndusInd Bank, India's fifth-largest private lender with a balance sheet of $63 billion, disclosed on March 10 that its derivatives portfolio had been overvalued by approximately 2.35 per cent, resulting in an estimated derivative loss of ₹2,000 crore.

 

Following this, CEO Sumant Kathpalia and Deputy CEO Arun Khurana resigned, taking moral responsibility for the discrepancies. 

 

A forensic review by Grant Thornton found that both executives had traded IndusInd shares while already aware of the accounting lapses, prior to the public disclosure, raising potential insider trading concerns, according to a report by Reuters. The bank is currently reviewing these findings.

 

To stabilise operations, the Reserve Bank of India (RBI) approved the formation of an interim committee of executives to oversee the bank’s day-to-day management. Moody’s recently downgraded IndusInd Bank’s standalone financial profile, citing internal control weaknesses and insufficient oversight by management.