IndusInd bank’s latest set of issues in the form of an “accounting discrepancy” has tanked the stock.
While there are no reasons to believe depositors need to be worried at this point, from an investor’s perspective, the optics of the latest episode are concerning.
The stock price has reacted just as much, falling by 27% in a single day on 11th March 2025.
The latest surprise comes in the form of an accounting discrepancy in forex hedges NOT on the asset side or the loan book.
IndusInd Bank’s NRI Deposit Bet: A success, until it wasn’t
According to Krishan Appala, a fund manager at Capitalmind – In the recent years, IndusInd Bank aggressively pursued NRI deposits, offering attractive interest rates to lure in foreign currency inflows. By Q3 FY25, the bank had accumulated ₹58,600 crore in NRI deposits—about 14.3% of its Total deposits of 4.09 Lac Cr.
On the surface, this seemed like a smart strategy. NRI deposits are a stable, long-term source of funds, and for a bank looking to expand, they provide liquidity without the volatility of corporate or wholesale deposits. But behind the scenes, something more complex was happening. A series of internal hedging manoeuvres—designed to manage foreign exchange risk—worked well, until an accounting mismatch flipped the bank’s playbook upside down.
This wasn’t about fraud. It wasn’t even about bad loans. It was about a simple yet costly accounting discrepancy that forced IndusInd to take a ₹1,500 crore hit to its Q4 FY24 profits, about 2.3% of its Total net worth.
The mechanics of the trade
Let’s say an NRI deposits $1 million into an NRE account for five years. Since NRE accounts are held in INR, the bank converts the dollars into rupees at the prevailing rate—let’s assume ₹86 per USD. That gives the bank ₹8.6 crore, which it can now lend out or deploy in its business.
The challenge? At the end of five years, when the NRI wants their money back, the bank must return the deposit in dollars. If the exchange rate changes, which it almost certainly will, IndusInd could be caught in a bind—what if the rupee depreciates significantly and it now takes ₹100 to buy a single dollar? That’s a problem.
Banks don’t leave such risks unmanaged. This is where hedging comes in.
How the risk was managed
The ALM Desk handles risk by transferring the $1 million liability to the Trading Desk through an “internal (derivative) trade”.
ALM Desk receives ₹8.6 crore to use as they wish.
Trading Desk takes on the dollar obligation, agreeing to return ₹8.6 crore in five years.
But this doesn’t remove the risk—it just shifts it – internally.
The Trading Desk, now holding large dollar liabilities, hedges them externally by entering a currency swap, a derivative contract used to hedge currency risk, with a global bank. This locks in an exchange rate, protecting against fluctuations.
Ideally, these internal and external hedges should cancel each other out.
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