₹4,975 Crore Blow to Financials Reveals Deep Systemic Weaknesses
IndusInd Bank’s March quarter results for FY25 have unveiled the most significant financial setback in its history, driven largely by systemic lapses in its microfinance portfolio rather than the much-publicized derivative accounting irregularities. The total impact on financials, based on the auditor’s report and disclosures, stands at approximately ₹4,975 crore, comprising accounting reversals, classification adjustments, and provisioning. This financial blow marks the deepest quarterly loss ever for the private sector bank, with gross non-performing assets (NPAs) now exceeding 3%.
Highlights:
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Total impact: ₹4,975 crore, with ₹3,016 crore linked to microfinance provisioning and ₹1,959 crore to derivative accounting lapses.
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Q4 FY25 net loss: ₹2,328.92 crore, largest in the bank’s three-decade history.
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Gross NPAs now above 3%.
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Audit findings raise suspicion of fraud, with RBI reportedly considering tagging the episodes accordingly.
Microfinance Woes Take Centre Stage Over Derivative Issues
Contrary to initial expectations, microfinance-related lapses have emerged as the larger concern for IndusInd Bank, outweighing the ₹1,959 crore hit from improper derivative accounting that dates back to FY16–FY24. A forensic audit has validated the internal findings related to treasury operations, but a deeper concern lies in the bank’s microfinance accounting procedures, which were also flagged by the internal audit department.
Provisioning and contingencies for Q4 FY25 spiked to ₹2,522 crore, with ₹1,791 crore attributed to reclassification of microfinance loans from standard assets to NPAs. This reclassification affected a staggering 95% of previously standard MFI assets, leading to ₹1,885.19 crore in fresh NPAs from the segment.
The audit also revealed that ₹172.58 crore was wrongly reported as fee income over three quarters and reversed in Q4. Additionally, ₹1,368 crore in interest income had to be reclassified due to misrepresentation within the profit and loss account.
Highlights:
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MFI provisions: ₹2,522 crore, with ₹1,791 crore due to asset reclassification.
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Additional NPAs from MFI portfolio: ₹1,885.19 crore.
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Incorrect income classification: ₹1,368 crore impact on interest income, ₹172.58 crore reversed from fee income.
Derivatives Accounting Lapses Quantified but Secondary
The original trigger for the forensic and internal audit reviews — incorrect derivatives accounting — resulted in a write-off of ₹1,959 crore, reported as a prior-period adjustment. The losses stem from foreign exchange derivatives transactions and were not reflected in earlier financial periods, thus impacting net worth rather than quarterly profitability.
The bank admitted these discrepancies in its March 10, 2025 disclosure to stock exchanges. Former CEO Sumant Kathpalia had earlier provided guidance on the likely scale of these losses, which has now been corroborated by both internal and external reviews.
Despite the heavy focus on derivatives in the public narrative, it is the revelations within the microfinance division that are now causing more alarm across regulatory and investor circles.
Highlights:
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Derivatives-related loss: ₹1,959 crore, recognized as a prior-period item.
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Pertains to FY16–FY24, directly affecting net worth, not P&L.
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External forensic audit validated internal findings on treasury operations.
Management Responses and Auditor Observations Raise Further Questions
In the May 22 analyst call, the management acknowledged errors in classification across income categories, clarifying that the impact on the overall P&L was neutral but that regrouping was necessary. However, when probed for further details on how adjustments were executed, the bank deferred queries to offline discussions and referenced the notes to accounts.
Auditors have raised the red flag, stating that the nature of the misstatements — both in derivatives and microfinance — may involve fraud, a conclusion that aligns with a Moneycontrol report indicating the RBI is likely to classify the lapses as fraudulent activity.
Additionally, the bank’s own admission that adjustments were allocated to “respective underlying businesses” and that classification was corrected without impacting profitability adds to the opacity surrounding its financial reporting processes.
Highlights:
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Management claims P&L was unaffected by classification changes, but fails to clarify specifics.
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Auditor notes hint at potential fraudulent activity.
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RBI reportedly reviewing the possibility of tagging these lapses as fraud.
Reconstructed Financials Show Underlying Operating Profitability
Despite the hit, management offered a view of the bank’s core performance by excluding one-offs, restatements, and inter-head adjustments. As per this reconstructed view:
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Net interest income: ~₹4,700 crore
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Non-interest income: ~₹2,500 crore
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Operating profit: ~₹3,060 crore
Still, the credibility of these adjusted figures will depend on further disclosures, regulatory scrutiny, and the final stance taken by the Reserve Bank of India, especially if fraud is established.
Highlights:
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Reconstructed net interest income: ~₹4,700 crore.
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Non-interest income (ex-adjustments): ~₹2,500 crore.
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Operating profit (excluding exceptional items): ~₹3,060 crore.
