In early March 2025, IndusInd Bank, one of India’s prominent private-sector lenders, stunned markets with a disclosure that sent its share price tumbling 27% in a single day—a staggering ₹20,000 crore wipeout in market capitalization. The culprit? An accounting discrepancy in its forex derivatives portfolio that had inflated profits by an estimated ₹1,530–2,000 crore over five to seven years. While the bank has framed this as a one-time “technical glitch” to be absorbed in its Q4 FY24 results, a closer look reveals a deliberate strategy involving internal currency swaps—a practice that raises red flags not just for IndusInd but potentially for the broader Indian banking sector. This isn’t mere ignorance; it’s a calculated move that demands deeper scrutiny across the industry.
The Mechanics of the Overstatement
At the heart of the issue lies IndusInd’s handling of yen-denominated loans—cheap, long-term borrowings from international markets or non-resident deposits, likely totaling tens of thousands of crores in rupee terms. With Japan’s ultra-low interest rates (0.1%–0.5%), these loans were a golden opportunity for IndusInd to borrow at a fraction of India’s 6–8% rupee rates, then lend domestically at a profit. But there’s a catch: the yen’s value against the rupee fluctuates. If the yen appreciates (say, from ₹0.70 to ₹0.80 per yen), the rupee cost of repaying those loans spikes—a risk IndusInd sought to hedge with currency swaps.
In a typical swap, IndusInd would pay a floating rupee rate (tied to a benchmark like MIBOR) and receive fixed yen payments to cover the loan’s interest and principal, neutralizing forex volatility. So far, so standard. But here’s where it gets murky: instead of always using external counterparties (like other banks) for these swaps, IndusInd relied heavily on internal trades—deals between its own treasury desks. The external swaps were “marked-to-market,” adjusting their value daily based on exchange rates and interest rates, reflecting real-time gains or losses. The internal swaps, however, were booked using “swap cost accounting,” keeping their value fixed at the original terms, untouched by market shifts.
This mismatch was no accident. When the yen appreciated, the external swaps showed losses (more rupees owed), hitting the profit-and-loss statement. Meanwhile, the internal swaps—and the loans they hedged—stayed static, as if the rising rupee cost didn’t exist. The result? Profits appeared higher than they were. For example, a ¥50 billion loan borrowed at ₹3,500 crore (¥1 = ₹0.70) in 2020 ballooned to ₹4,000 crore (¥1 = ₹0.80) by 2025—a ₹500 crore increase. The swap might offset this, but if the loan’s cost wasn’t updated, the books hid the hit. Multiply this across a portfolio, and you get a ₹2,000 crore overstatement.
Deliberate, Not Ignorant
IndusInd has downplayed this as a bookkeeping error, but evidence suggests intent over ignorance. First, this wasn’t a one-off. The overstatement spanned 5–7 years, implying a systematic approach baked into their treasury operations. Second, internal swaps aren’t a rookie mistake—they’re a choice. External swaps with third parties are costlier (due to fees and margins) and less flexible, while internal trades let the bank control both sides of the deal, smoothing reported earnings. The 2023 Annual Report flagged derivative valuation as a “Key Audit Matter,” hinting auditors knew something was off—yet the practice continued until the Reserve Bank of India (RBI) banned internal forex swaps in September 2023, effective April 2024.
Why deliberately misalign accounting? The incentives are clear. Private banks like IndusInd face relentless pressure to show robust net interest margins (NIMs) and profitability—key metrics for investors and regulators. By fixing the loan outflow on paper while letting swaps float, IndusInd could report steady NIMs (around 4.2–4.3% in recent years) even as forex volatility churned beneath the surface. Early loan repayments or swap unwinds further masked losses, kicking the can down the road. This wasn’t a glitch in a spreadsheet—it was a strategic play to polish financials, likely sanctioned at high levels given its scale and duration.
The Fallout and IndusInd’s Defense
When the RBI’s new rules forced IndusInd to unwind internal trades in 2024, the house of cards began to wobble. An internal review, validated by an external agency starting October 2024, exposed the ₹2,000 crore gap—about 2.35% of the bank’s ₹65,102 crore net worth. The March 10, 2025, stock exchange filing triggered the market rout, with shares hitting a 52-week low of ₹655.95. CEO Sumant Kathpalia insisted the bank would remain profitable for FY24, and promoter Ashok Hinduja pledged capital support, but trust took a hit. Brokerages slashed forecasts—CLSA cut its price target from ₹1,300 to ₹900—citing credibility concerns.
IndusInd argues this isn’t fraud, just an accounting quirk. They’re not wrong in a legal sense—there’s no evidence of siphoned funds or fake transactions. But deliberate or not, the outcome was the same: overstated profits misled investors, regulators, and the public. The RBI’s one-year extension of Kathpalia’s tenure (versus the requested three) in February 2025 suggests governance worries predated this disclosure, amplifying the stench.
A Wider Industry Problem?
IndusInd isn’t alone in tapping foreign loans or using derivatives—Indian banks borrowed ₹1.06 lakh crore overseas by 2023, per RBI data, with private players like HDFC, ICICI, and Axis in the mix. How many others leaned on internal swaps to smooth forex outflows? The RBI’s 2023 ban implies regulators suspected a trend, yet enforcement has been lax until now. IndusInd’s scale—over ₹2 lakh crore in assets—makes it a big fish, but smaller banks with thinner margins might’ve taken similar shortcuts, especially post-COVID when forex volatility spiked (e.g., the rupee fell from ₹75 to ₹83 against the dollar by 2023).
The opacity of internal trades is the kicker. Unlike external swaps, which face market scrutiny, internal deals are a black box—perfect for hiding volatility or juicing numbers. If IndusInd, with its sophisticated treasury, could let this fester for years, what’s lurking in less-scrutinized balance sheets? The RBI’s Basel III norms track forex risk, but derivative accounting loopholes persist. Posts on X speculate this is “no smoke without fire,” and analysts warn of “contagion” if others fess up.
The Call for Deeper Probes
IndusInd’s case demands more than a slap on the wrist. The RBI must audit its treasury records—not just the headline ₹2,000 crore, but every internal swap since 2018—to confirm intent and scope. Was this a board-level strategy or rogue treasury desk? Penalties should match the deception’s scale, not just the loss. More critically, the regulator can’t stop here. A sector-wide stress test of forex derivative books—focusing on internal trades—is overdue. Banks should disclose foreign loan exposures and hedging practices, broken down by currency and counterparty (external vs. internal). SEBI, too, should probe whether IndusInd’s rosy earnings misled shareholders, breaching listing norms.
This isn’t about punishing IndusInd alone—it’s about trust. Indian banking fuels economic growth, and fudged numbers erode confidence. If internal swaps are a systemic trick to fix loan outflows on paper, the iceberg’s tip just surfaced. Ignoring it risks a bigger meltdown when the next yen—or dollar—surge hits.
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