IndusInd Bank Board Scores An Own Goal With 'Suspected Fraud' Statement

The board of India's fifth-largest private sector bank erred when it announced it suspected fraud at the bank with respect to recognition of interest when it disclosed the fourth quarter earnings late on Wednesday.

The bank, which is being managed by non-executive directors, has seen its key management personnel (KMP) quit in the last month.

To begin with, the board has spooked the investors and regulator with a 'suspected fraud' statement. And that is the fear the regulator will have to manage in the coming weeks and months.

So far, for reasons best known to the Reserve Bank of India, the regulator is yet to put a nominee director on the board of IndusInd. Not to say it is the same board members who were part of the audit committee and other statutory committees which failed to check the irregularity and practices at the private bank.

The IndusInd franchisee has seen significant erosion of faith in the last two-to-three quarters. The operating level losses and higher than indicated provisions point to significant breakdowns in the accounting processes. With the board expected to report to the regulator and investigating agency, the operation of the bank is expected to come to a standstill.

The entire finance and compliance team is under the scanner, and IndusInd Bank will have to report to the investigating agencies like the Economic Offences Wing to find accountability. In the next few months, as more key employees exit, the bank operations not only at the corporate level but also at the branch level will face significant headwinds. Advances will be impacted, and customers will migrate their deposits to safer banks like the PSUs.

While the bank's day-to-day operations are now being managed by a committee of executives, one would not be surprised if these individuals played it safe till the appointment of an accountable person by the RBI.

The board has stated it will look to share probable candidates with the RBI by the end of June. The board was aware of the issue; the regular indicated when the CEO did not get an extension, and despite these early warnings, the process has been slow.

It is like pointing the gun at the regulator to fast-track the process of CEO appointment as and when the names will be shared. What will the RBI do? the obvious, it will play safe and most likely appoint a PSU banker to head the bank and stabilise the operations. From the RBI point of view, shareholders are not a priority; it is the depositors which are the priority. It does not want the situation to aggravate into another Yes Bank situation. That is a big negative for the shareholders as growth takes a back seat and stabilising operations comes to the front.

Only a Braveheart private sector executive will accept the opportunity to steer the private bank at this point. The bank in the next few quarters will have to rejig its entire finance and compliance departments. The reporting to regulators and investigating agencies brings in another uncertainty in the operations of the banks but also another challenge for the new CEO when appointed.

IndusInd Bank will mostly exit the benchmark indices. That would lead to selling the stock. It is expected that it will be the first to exit the BSE benchmark Sensex when the rejig is announced this week.

The domestic institutional investors are staring at significant asset value erosion. Mutual funds have raised their stake from 17.8% in March 2024 to 27.58% at the end of March 2025. Insurance companies have raised their stake marginally to 7.43%, while foreign investors have reduced their stake from 36.36% to 28.46% in the same period.

To be clear, the IndusInd Bank has a good franchisee, but it does not have credible management. The challenge is to bring this credibility back – and markets do not restore credibility and governance premiums easily.