IndusInd Bank: A Messy, Forgettable Affair Ends, But Questions Remain

While Kathpalia's exit was fated, the timing was probably a surprise to many. News reports that had called out that the CEO and his deputy would resign before their term ends, had said that it would happen after suitable replacements were found.

The Reserve Bank of India had cleared a one year extension for Kathpalia last month, ensuring that his tenure would end in March 2026. This was the second one-year extension he had received from the regulator.

With this, we are seeing an end to a messy, forgettable saga at the private sector bank. The accounting discrepancy, which was originally dubbed as a derivatives portfolio issue on March 10, pointed at a material controls issue at the bank.

As NDTV Profit had previously reported, which was then confirmed by an independent investigation, the issue was poor accounting standards in the internal trades undertaken at the bank. With this, the bank had breached long standing accounting principles.

To add to the misery, IndusInd Bank disclosed on April 22 that it had found certain material issues in its microfinance portfolio, which are also under investigation. The internal audit department at the bank is reviewing these issues and global consulting firm EY is aiding it.

While Kathpalia's exit was fated, the timing was probably a surprise to many. News reports that had called out that the CEO and his deputy would resign before their term ends, had said that it would happen after suitable replacements were found.

The Reserve Bank of India had cleared a one year extension for Kathpalia last month, ensuring that his tenure would end in March 2026. This was the second one-year extension he had received from the regulator.

With this, we are seeing an end to a messy, forgettable saga at the private sector bank. The accounting discrepancy, which was originally dubbed as a derivatives portfolio issue on March 10, pointed at a material controls issue at the bank.

As NDTV Profit had previously reported, which was then confirmed by an independent investigation, the issue was poor accounting standards in the internal trades undertaken at the bank. With this, the bank had breached long standing accounting principles.

To add to the misery, IndusInd Bank disclosed on April 22 that it had found certain material issues in its microfinance portfolio, which are also under investigation. The internal audit department at the bank is reviewing these issues and global consulting firm EY is aiding it.

To say that Kathpalia had an eventful tenure at IndusInd Bank is probably an understatement. Since he took over at the bank in March 2020 and till December 2024, the advances have risen 12% on a compounded annual growth rate basis to Rs 3.66 lakh crore. Deposits were up 15% at Rs 4.09 lakh crore.

These can be seen as middling performance, because larger peers have grown much faster. But the bank's microfinance portfolio has been a source of pain for some time.

In November 2021 it was revealed that a whistleblower letter had alleged evergreening in subsidiary Bharat Financial Inclusion Ltd. While the allegations were quickly rubbished, other issues did crop up.

In an audit the bank found that nearly 84,000 microfinance loan accounts were opened without adequate customer consent and loans were disbursed to them. This happened because of a faulty tech patch the bank had deployed on devices held by its employees.

This was also a time when IndusInd Bank was facing severe turbulence in the microfinance business, as the second wave of the Covid-19 pandemic wreaked havoc.

That pain was not shortlived though. In the following years, the microfinance book has continued to add pain to IndusInd Bank's balancesheet.

During the analyst call after announcing the December quarter results, Kathpalia had highlighted that the microfinance portfolio was showing some signs of stability, but concerns still remained.

"...the 30 to 90 DPD (days past due), which is a good indicator of the stress and slippages, is still elevated at 4% because October and November were challenging months for micro finance," Kathpalia had told analysts.

The state of Karnataka, which accounted for 13% of the bank's microfinance book, has introduced a law against forcible recovery practices. Due to uncertainty on how this law would be implemented on ground, the bank had been bringing down their outstanding loans. In recent months, Tamil Nadu has proposed a similar law, which may have an impact on recovery.

"We are watching the space. Initially, there is some amount of discomfort. Now I think things are slightly settling down in terms of the legislation or the ordinance front, but the space is to be watched," Kathpalia had said.

Net interest margin, an indicator of the quality of profitability for IndusInd Bank has plumetted during Kathpalia's tenure. Part of the reason for a sharp deterioration in NIM was lower microfinance balances on a sequential basis.

The wonky profitability also affected executive remuneration. According to details in IndusInd Bank's annual report, Kathpalia's annual pay has remained at Rs 7.5 crore since he took over. His pay is 154.5 times the bank's median employee remuneration.

The whole saga at IndusInd Bank raises key questions for its board as well. To begin with, how could a board have missed key accounting issues at the bank for so long? The bank in its March 10 disclosures had said that it had first discovered the issues in October 2024. If so, for six months the bank's management and the board kept these details hidden from shareholders.

The third quarter results announcement did not include any details of a discrepancy being discovered at the bank. In September 2024, the board actually recommended a three-year extension for Kathpalia. There is no record of a rethink at the board level about this extension despite a sizeable issue at the bank.

Secondly, the board only initiated an independent investigation on March 20, a full 10 days after the initial disclosures. Why did the board wait for 10 days? If the issues were discovered in October, the investigation ought to have been initiated then.

Let's say that the board did not know the gravity till the March 10 disclosures. Why the 10 day wait still? Sources state that the RBI insisted on the accountability exercise to be carried out, so people responsible for the lapse could be held responsible. A competent board should not need a regulator interfering in its duties.

Another issue here is that people helming the treasury and accounting functions should have been sent on administrative leave till the investigation was completed. But IndusInd Bank's board did not deem it necessary. Why did the board do this? There seem to be no answers right now.

As the bank disclosed Kathpalia's resignation, it also said that the board had recommended creating a "committee of executives" to discharge the functions of the CEO, till a new CEO is appointed. This was then cleared by the regulator.

A CEO's role cannot be left to committee-based decision making. Did the board not find a single senior official at the bank to be an interim CEO? That raises questions of key-man risk at IndusInd Bank.

Time again in Indian banking we have seen private bank boards siding with the management, even during times of governance turmoil. In cases like ICICI Bank and Yes Bank the CEOs were fully being backed by the board till the situation went beyond its control.

Maybe this is a question for the RBI to answer. If bank boards will only act decisively after regulatory intervention, should the regulator then bring new norms to clear each board decision before it is made public? Hey, it may not be a bad idea!