By Siddhi Nayak and Ira Dugal
MUMBAI, March 21 (Reuters) – The Reserve Bank of India has urged the CEO of IndusInd Bank and his deputy to step down after significant accounting lapses as soon as replacements are found and the central bank has approved them, according to four sources familiar with the conversations.
IndusInd is India’s fifth largest private lender, with a 5.4 trillion rupee ($63 billion) balance sheet. On March 10 it disclosed that its derivatives portfolio was overvalued by around 2.35% – about $175 million – after non-compliant internal trades.
The bank, headed by Sumant Kathpalia, has appointed external investigators. His deputy, Arun Khurana, also heads the global markets division, which includes the derivatives portfolio.
The RBI made clear that it had lost confidence in the top executives, but that it wanted an orderly transition to avoid unnerving depositors, said one of the sources, briefed by top management.
A second source said the RBI, which only recently approved a one-year extension for Kathpalia, had also made clear that it wanted the candidates to come from outside IndusInd.
While a bank’s board makes recommendations for top executive positions, RBI approval is required. The central bank is known to offer informal advice to lenders facing governance or financial concerns that it would prefer an external candidate.
After the discrepancies were disclosed, the RBI issued a statement assuring depositors that the bank was well capitalised.
Emails sent to the RBI, IndusInd Bank, Kathpalia and Khurana were not answered.
The sources said the accounting discrepancy – which contravened RBI rules introduced only in April 2024 – did not appear to be an industry-wide problem.
The first source said it was a clear issue of lack of oversight, and another source said it had come to light in September 2024 when it was flagged to Kathpalia.
Moody’s Ratings on March 17 put the bank’s rating on review for possible downgrade.
“The discrepancy in the accounting shows weakness in the bank’s risk management, compliance and reporting and persistent weaknesses in these areas could weaken IndusInd’s reputation, and hence its funding and liquidity,” it said.
IndusInd Bank shares have tumbled over 30% this month. ($1 = 86.0350 Indian rupees) (Reporting by Siddhi Nayak and Ira Dugal; additional reporting by Swati Bhat; Editing by Kevin Liffey)