Central Bank Engaged with Grant Thornton to Evaluate Lapses in Treasury Operations
The Reserve Bank of India (RBI) is currently deliberating whether certain foreign exchange and treasury operation lapses at IndusInd Bank should be officially classified as fraud. According to individuals familiar with the matter, the central bank is closely coordinating with forensic auditor Grant Thornton to examine the extent of accounting discrepancies and procedural failures. The regulator’s final decision will also weigh findings from a parallel report by audit firm EY, which is separately investigating issues in the bank’s microfinance division.
Sources indicate that the RBI’s attention has been drawn to potential deliberate misrepresentation in the bank’s internal derivative trade accounting, especially concerning early terminations that resulted in inflated notional profits. These concerns stem from an initial forensic audit suggesting that the lapses were not inadvertent errors but occurred with the knowledge of senior bank personnel.
Highlights:
RBI is working with Grant Thornton to assess forex operation discrepancies.
Classification of events as fraud under discussion based on audit findings.
EY is separately examining irregularities in the microfinance portfolio.
Forensic Report Suggests Awareness Among Senior Executives of Lapses
According to senior officials briefed on the audit, the initial findings by Grant Thornton indicate that key individuals involved were aware of the lapses in internal derivative trade accounting. Contrary to early statements from the bank’s former leadership, the issues appear to have resulted from deliberate bypassing of standard procedures rather than accidental mistakes.
Under standard protocols, a bank’s board holds the responsibility to identify and report a transaction as fraudulent. However, in exceptional circumstances, the RBI is empowered to intervene and direct the board to reclassify a transaction as fraud, especially when evidence of intent or negligence surfaces through forensic scrutiny. If classified as fraud, the matter may be escalated to law enforcement authorities for further investigation.
Highlights:
Forensic audit suggests lapses were not accidental but informed.
RBI may direct IndusInd Bank’s board to label certain deals as fraud.
Possible referral to police authorities if fraud classification is confirmed.
Senior Leadership Resignations Signal Depth of Compliance Failures
The public release of Grant Thornton’s findings was quickly followed by the resignation of key executives at IndusInd Bank, including Managing Director and CEO Sumant Kathpalia and Deputy CEO Arun Khurana. Both executives acknowledged their oversight responsibilities and stepped down from their roles in the wake of the forensic revelations.
In his resignation letter, Kathpalia stated that he was taking “moral responsibility” for the acts of omission and commission that had come to light. Khurana, responsible for the treasury front office function, directly referenced the adverse impact of accounting errors in his statement, citing his senior management position as grounds for stepping aside. Their departures, along with the exit of other employees involved, suggest deeper organizational failures in internal compliance and governance.
Highlights:
IndusInd Bank MD & CEO and Deputy CEO resigned after audit findings.
Resignations indicate acknowledgment of governance and compliance lapses.
Departure of senior executives points to potential willful mismanagement.
Regulatory Decision Hinges on Wider Financial Review and Governance Context
RBI sources revealed that the decision to officially classify the incident as fraud would depend on comprehensive inputs from both Grant Thornton and EY. While Grant Thornton’s audit encompasses treasury operations and income recognition practices, EY’s audit is focused on the microfinance portfolio, which may also reveal systemic process flaws across the institution.
Regulators are also considering the broader implications of the case, given IndusInd Bank’s significant market standing. With total deposits of ₹4.11 lakh crore and advances of ₹3.47 lakh crore as of March FY25, IndusInd ranks as India’s fifth-largest private sector bank. This scale and systemic importance could influence the RBI’s handling of the issue, especially to avoid destabilizing broader market sentiment.
Highlights:
Final RBI classification decision pending full audit reports.
Grant Thornton covering treasury and accounting systems; EY probing microfinance.
IndusInd Bank’s systemic significance being factored into regulatory response.
Internal Review Revealed Profit Inflation via Incorrect Derivative Accounting
On March 10, IndusInd Bank disclosed in an investor call that an internal review had uncovered discrepancies in its derivative portfolio accounting. Specifically, early termination of internal derivative trades had led to inflated notional profits being recorded, contrary to appropriate accounting treatment. The bank admitted that these discrepancies could result in an adverse impact on its net worth, estimated at approximately 2.35% as of December 2024.
While the financial impact is said to fall within the bank’s own guidance parameters, questions remain over whether the misstatements were willful. Initial management statements characterized the discrepancies as procedural errors, but subsequent resignations and forensic findings have cast doubt on this narrative.
Highlights:
Internal review showed inflated notional profits from early derivative closures.
Bank estimated financial hit at 2.35% of net worth as of December 2024.
Investigations are probing whether misstatements were intentional or negligent.
Forensic Audit Expands Beyond Treasury to Enterprise-Wide Review
Banking insiders confirmed that the forensic audit led by Grant Thornton has expanded its scope beyond the treasury function. The firm is now analyzing processes across business lines, particularly around accounting and income recognition. This broader review is expected to take additional time, delaying the regulator’s final assessment and potential enforcement actions.
Anonymously quoted senior bankers suggest that the depth and breadth of the audit reflect concerns of systemic process failures, not merely isolated incidents. This has heightened the need for regulatory clarity and transparency, particularly as investor and market confidence in private sector banks remains sensitive to governance failures.
Highlights:
Grant Thornton’s audit scope includes cross-business process reviews.
Audit timeline extended due to deeper systemic analysis.
Market and investor confidence hinges on timely regulatory clarity.
IndusInd Bank Says It’s Cooperating Fully with Regulatory Authorities
In response to queries regarding the ongoing investigations, IndusInd Bank reiterated that it is actively engaging with all relevant regulators and would comply with all applicable laws and reporting obligations. A spokesperson confirmed that the bank is taking necessary actions based on audit findings and is committed to enhancing transparency.
Despite repeated attempts, the RBI has not officially commented on whether it intends to classify the lapses as fraud. According to sources, further developments are expected in the coming weeks as the regulator reviews the full scope of findings from both auditing firms and internal committees.
Highlights:
IndusInd Bank says it is cooperating fully with regulatory bodies.
RBI has not issued an official response on fraud classification.
Decision expected in the coming weeks following audit completion.
