Restoring lost trust will be the priority for IndusInd’s CEO

When the Reserve Bank of India (RBI) removed YES Bank founder, MD & CEO Rana Kapoor, Ravneet Gill took over as the CEO in March 2019. Unaware of the depth of the problem, Gill, a former Deutsche Bank executive, completely underestimated the stressed portfolio, with non-performing assets (NPAs) exceeding estimates quarter after quarter. He failed to raise the much-needed capital.

Within a year, the RBI superseded the board and roped in State Bank of India, the country’s largest bank, and some private banks to pump in additional capital. But six years later, this mid-sized private bank is yet to regain pre-crisis returns, with full recovery still years away.

Another old private sector bank, RBL Bank, faced a similar crisis in 2021 as CEO Vishwavir Ahuja, a Bank of America professional who turned around the small-sized bank, abruptly exited amid RBI intervention over rising NPAs. A new public sector CEO, R. Subramaniakumar, stabilised operations, but even after more than three years, shareholder returns are still below pre-crisis levels.

Much like YES Bank and RBL, private lender IndusInd Bank finds itself at a crossroads. Its troubles came to light on March 10, when the bank disclosed discrepancies in its derivatives portfolio. That caused a 2.35% erosion in its net worth.

Then, problems were identified in the microfinance portfolio, where misclassification resulted in under-provisioning and non-recognition of NPAs of Rs 1,885 crore. This triggered a chain of events that resulted in the unceremonious exit of MD & CEO Sumant Kathpalia. The situation is volatile with key exits like those of the Deputy CEO and CFO. Lacking an internal successor, the bank’s board has shortlisted three external candidates for the MD & CEO position: Anup Saha, MD of Bajaj Finance; Rajiv Anand, Deputy MD of Axis Bank; and, Rahul Shukla, Group Head–Commercial and Rural Banking of HDFC Bank. RBI requires a ranked panel of two candidates but can reject both and seek a fresh list, as seen in past cases.

While the new management team is still months away, it is evident from what transpired at YES Bank and RBL that it takes years to rebuild trust once lost. “The initial years are often spent on establishing a new leadership team and ensuring its stability, overhauling the mid-level organisational structure, implementing a new business model focused on sustainable and less risky assets, adopting a tighter credit assessment framework, and introducing new systems and processes with a strong emphasis on compliance and risk management,” says a former banker.

YES Bank and RBL Bank are still struggling to regain past glory due to a shift towards low-yield, secured lending. In fact, there could be more surprises in the form of new disclosures and additional provisioning like what happened at YES Bank. “Given the recent governance lapses, undisclosed risks may persist. A new CEO should mandate independent stress tests and forensic audits to uncover potential asset quality issues, off-balance-sheet risks or compliance gaps,” says Atul Parakh, CEO of Bigul, a next generation algo-trading investment platform.

There are already serious concerns, including accounting lapses, compliance failures, insider trading, and potential fraud—an ex parte interim order by the Securities and Exchange Board of India (Sebi) has already banned five senior executives, including Kathpalia and ex-Deputy CEO Arun Khurana, from participating in the securities markets.

In a recent note, Nuvama Research said the new CEO will have to tighten internal controls, strengthen governance and likely rebalance the asset mix. “Proactively addressing legacy underwriting practices and collateral valuations is critical. Transparency post-assessment could restore stakeholder trust,” says Parakh.

There are broadly three key questions on investors’ minds regarding the bank, which reported a balance sheet of Rs 5.5 lakh crore at the end of FY25 (up 53% since FY21). First, does the rot run deeper than what has come to light? Second, does the bank’s business model require a drastic overhaul? And, finally, isn’t it the board’s responsibility—since it remains in place—to act far more proactively than it currently is?

Hidden Landmines

The incoming CEO will have the advantage of starting with a fresh slate, but the first big task will be to conduct a stress test of the entire lending portfolio and clean up the mess. The new CEO must undertake a comprehensive stress test of the portfolio across microfinance institutions (MFIs), MSMEs, and corporate banking—especially in real estate, construction, and gems and jewellery sectors.

“A clear and honest disclosure of stressed areas, especially within the MFI book, will help pre-empt speculation. It will also provide a comparative context with peers to position the bank as a proactive and transparent institution,” says Sriram Kalyanaraman, BFSI Advisor at Practus, a performance improvement and business transformation firm.

“There’s a strong chance the bank is hiding more trouble, given the recent accounting errors (Rs 1,520–2,000 crore in derivatives) and microfinance fraud (Rs 172.58 crore fee income misreported),” says Datt B Jadhav, Founder & Research Analyst at Money Tree Ventures Trading Academy. Jadhav says the new CEO has a legal duty to dig deep with stress tests and thorough audits to uncover any hidden risks, such as unreported bad loans or employee misconduct. “Avoiding these steps could lead to hefty fines, insider trading claims, or further erosion of trust, threatening the bank’s stability,” he adds.

Meanwhile, the Financial Reporting Review Board (FRRB) of the Institute of Chartered Accountants of India (ICAI) is conducting a review of the bank’s financial statements and the statutory auditor’s reports for FY24 and FY25. This is to determine whether there were any deviations from accounting standards. The NFRA is also in talks with Grant Thornton, which conducted a forensic audit of the bank, as well as with the RBI, whose banking supervision wing holds relevant information on the matter. The Grant Thornton report has not been made public.

Auditors have revealed that their investigation has uncovered serious issues involving senior officials at the bank, including former top executives. These individuals were found to have overridden key internal controls. “This indicates direct involvement of several mid-level employees,” says an analyst at a domestic brokerage.

Sunil Mehta, the bank’s Chairman, has already said the board is also in the process of taking necessary steps to assess roles and responsibilities and fixing staff accountability as per the law and the bank’s internal code of conduct. “We are approaching these aspects with utmost seriousness, without fear or favour to anyone involved in precipitation of these issues,” Mehta told analysts last month.

The management’s prolonged efforts to conceal the improper accounting practices from both the board and statutory auditors raises serious doubts about the credibility of many disclosures. “The findings indicate this was not a mere technical lapse or oversight, but a deliberate attempt to hide facts—raising concerns about the integrity of the bank’s financial reporting,” says a market participant.

According to company insiders, stress in two-wheeler and microfinance segments is increasing. NPAs in these two segments are nearing 10% and 13%, respectively. “These portfolios need to be stress-tested, and, if required, accelerated provisioning should be considered in FY26,” says another industry observer. The current outstanding in the two-wheeler segment is more than Rs 5,000 crore, whereas the micro loans portfolio was at Rs 30,000 crore in FY25.

In the corporate banking book, about 3% of the bank’s exposure is in the ‘BB’ and below rating categories. ‘BB’-rated instruments and those below fall into the non-investment or speculative grade, indicating high credit risk and a higher likelihood of default. “There is a real possibility of NPAs emerging from this bucket,” warns a rating analyst.

Business Model Changes

Kathpalia, who took over from Ramesh Sobti in March 2020 after an extensive succession process, had set a target of 60:40 retail-corporate loan mix. In fact, he stated that retail would grow faster than the corporate book, with the eventual aim of reaching 65:35. However, the current retail-corporate mix stands at 58:42. “Rebalancing towards granular, secured retail/SME lending and sectoral exposure caps could stabilise earnings. The RBI’s concerns on concentration risk (e.g., CLGS disclosures) underscore the need for a strategic pivot,” says Parakh of Bigul. The CLGS or the Climate-Linked Guidelines & Standards relate to banks’ exposure to coal, thermal, and other emission-related industries.

Despite a three-decade-long journey, the bank’s corporate loan portfolio remains concentrated with the domination of non-banking financial companies (NBFCs), real estate, gems & jewellery, steel, and power generation players. The mix hasn’t changed much over the years.

“The bank’s business model, especially its corporate banking, with heavy exposure to telecom and real estate, needs focused fixes, not a complete overhaul,” suggests Jadhav. Rating agency CRISIL has also highlighted the bank’s relatively high exposure to NBFCs, real estate developers, and the gems & jewellery segments, among others, while on the retail side, the bank has exposure to MFIs and the vehicle finance segment, which are inherently vulnerable to an economic downturn.

Chairman Mehta has hinted that the bank will be selective in the corporate space. “Overexposure to cyclical sectors (e.g., real estate, NBFCs) heightens vulnerability to economic shocks. The loan book’s lack of diversification contradicts prudential risk management,” says Parakh. Under Kathpalia, the bank did talk about building a more granular, short-duration, and annuity-driven portfolio. In fact, the former CEO once said that future growth will be driven by building specialisation in segments such as supply chain finance and MNCs. But that is not reflected in the books.

With the launch of the home loan product, the bank has forayed into stable retail loans. This is a recent initiative, but it lacks scale. The bank will continue to pivot its rural distribution towards Bharat Banking. It bought Bharat Financial Inclusion (earlier SKS Microfinance) in July 2019, which now acts as a vehicle for expansion in rural and semi urban areas. “The approach of disbursements is towards customers with long vintage and better past payment records,” stated the bank in what investors call a post-Kathpalia update. “Once the leadership is established, the board and the management will take a relook at the bank’s strategy — which segments we want to push and where we want to stay a little more cautious,” said the company in an investor call.

Mehta has said the bank has decided to be cautious on the microfinance segment. “The diversification into merchant advances continues. However, if you are expecting us to push the pedal or change the disbursement approach towards reducing what it is supposed to be, I don’t think so,” he told analysts.

The bank has a higher cost of deposits and cost of funds than its larger peers like ICICI Bank, HDFC Bank, and Axis Bank. The business model had tilted towards relatively high-risk, high-yield assets, with net interest margins (NIMs) of 4.10–4.30, much higher than its peer group. The high cost of funds and high-margin business works well if the risk is contained. In IndusInd Bank’s case, the fault lines are clearly visible. The bank’s CASA (Current Account and Savings Account) ratio of 35% is too low to scale up secured retail products like mortgages and passenger car loans due to tough competition.

CRISIL recently noted that the bank’s reliance on bulk deposits remains high with the top 25 depositors accounting for 16.23% of total deposits as on March 31, highlighting its dependence on a few large, and potentially volatile deposit sources. The bank needs to focus on liability mobilisation, especially increasing its CASA share.

While the current disclosure and accounting laxity could significantly impact the bank’s credibility and investor trust, the bank will have to pay more to attract retail deposits, say analysts. “We continue to scale our existing liabilities initiatives of Affluent and NRI Banking,” says the bank. Mehta has hinted that the bank would like to follow the ‘One Bank’ approach. Under this, all business units are expected to contribute to liability sourcing. ICICI Bank has implemented this model successfully by encouraging all employees to sell the full range of products, regardless of specialisation or domain.

Long Road Ahead

Nuvama Research notes that while most banks take three to four years to stabilise after accounting issues, IndusInd Bank may recover sooner, but its return on asset (RoA) is likely to stay below 1% through FY27. Other private banks like HDFC Bank and ICICI Bank have RoAs of more than 2%. “Uncertainty over retail depositor behaviour and the need to maintain high liquidity in the first half of 2025-26 may weigh on NIMs,” it says in its note.

“The bank should use the recent exits as an opportunity to reconstitute leadership with credible professionals who have strong domain expertise and execution focus across retail, SME, digital, and risk,” says Kalyanaraman of Practus.

Parakh of Bigul reasons that market confidence may hinge on board restructuring—independent directors with risk oversight expertise are vital. “Status quo risks regulatory intervention or investor attrition,” he says.

The promoters have said that they are fully committed to addressing the issues. “Though the capital adequacy of the bank is quite healthy, for business growth, should any further equity be required, IndusInd International Holdings, as the promoter of the bank, remains committed to supporting the bank, as it has done over the past 30 years,” Ashok Hinduja, the youngest of the four Hinduja brothers and Chairman of the Hinduja Group of Companies (India), said in a statement.

But as the Hinduja Group scales up its financial services play with Reliance Capital under its belt, the biggest challenge will be to put in place a strong senior management team and a robust governance framework. The regulators—RBI, Sebi, and the Insurance Regulatory and Development Authority of India—will also be much more vigilant now.

The bank has its task cut out as it navigates rsing regulatory scrutiny while winning trust and maintaining profitability and stability.