IndusInd Bank crisis: India’s banking sector is once again in the spotlight following the crisis at IndusInd Bank. The discovery of accounting discrepancies in foreign exchange derivatives, leading to a financial impact of Rs 1,577 crore, has raised serious concerns about transparency and governance. Regulatory scrutiny by the Reserve Bank of India is tightening, with broader implications for the sector. The crisis has brought to the fore a governance crisis in India’s banking sector, and the need for potential reforms to prevent such crises in the future.
IndusInd Bank’s troubles stem from an internal review that uncovered significant accounting mismatches related to foreign exchange derivatives. The situation worsened with the abrupt resignation of CFO Gobind Jain just before the December 2024 quarter results, fuelling speculation about weak internal controls and governance failures. These developments have eroded investor confidence, causing a 27% decline in the bank’s stock price and raising concerns about the reliability of its financial reporting.
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The RBI has since launched an industry-wide review of derivative positions to ensure that similar risks are not embedded in other banks’ financials. Analysts warn that a broader crisis affecting multiple banks could trigger liquidity issues, investor panic, and economic slowdown.
Need for structural reform in banking sector
One of the underlying issues leading to governance failures in the banking sector is the structural inefficiency of board oversight. Traditionally, boards of directors are expected to oversee both micro-level operational decisions and macro-level strategic planning. However, the complexity of modern financial institutions makes it difficult for part-time board members to effectively balance these roles. This mismatch between operational insight and strategic foresight results in gaps in oversight, often leading to regulatory lapses and governance crises.
A key solution to this challenge is strengthening the role of board committees, which allow for deeper scrutiny in specific areas such as financial risk, compliance, and corporate governance. Specialised committees can ensure that issues like risk exposure, executive compensation, and regulatory compliance are examined in detail before being escalated to the full board for final decision-making. Such an approach not only enhances efficiency but also improves accountability.
The IndusInd crisis highlights the importance of independent directors and expert advisory panels in corporate governance. Companies such as Infosys and Tata Steel have successfully implemented advisory panels within their board structures to improve governance quality. The Securities and Exchange Board of India (SEBI) has also advocated for stronger board structures, requiring listed companies to have independent directors and separating the roles of CEO and chairperson. These reforms align with global best practices and help ensure that boards function as proactive guardians of governance rather than mere rubber stamps for executive decisions.
Regulatory oversight for stronger governance
Despite India’s strong regulatory framework, the IndusInd crisis reveals gaps in corporate governance. While the RBI has implemented stringent capital adequacy norms and liquidity buffers, governance issues persist. The RBI’s decision to deny IndusInd CEO Sumant Kathpalia’s three-year term extension, offering only a one-year term, underscores the regulator’s dissatisfaction with governance at the bank.
Industry experts warn that a repeat of such governance failures could lead to increased regulatory interventions, tighter capital requirements, and more conservative lending practices across the sector. This could slow credit expansion, raise borrowing costs, and dampen economic growth.
Banks must strengthen their risk identification and assessment mechanisms. Strengthening internal audits is crucial to detecting financial irregularities before they escalate. Board-level risk committees should have greater autonomy and oversight over financial transactions. Additionally, AI-driven fraud detection tools should be integrated into banking operations to predict and prevent fraud in real-time.
Financial institutions must be better prepared to absorb financial shocks. This can be achieved through higher capital buffers, ensuring that banks maintain capital reserves beyond regulatory requirements to withstand financial crises. Comprehensive stress testing should be conducted regularly to simulate worst-case economic scenarios and prepare response strategies. Furthermore, enhanced transparency in public disclosure of risk exposure should be improved to boost investor confidence.
Banks must evolve with changing regulatory and economic landscapes. Corporate governance reforms are necessary, including strengthening board accountability, improving whistleblower policies, and ensuring independent directorship. A stronger compliance culture is essential, where employees at all levels must be held accountable for compliance breaches. Additionally, consumer-centric banking should be prioritised, with digital grievance redress mechanisms enhanced to improve customer satisfaction.
IndusInd Bank crisis: A wakeup call
The governance crisis at IndusInd Bank serves as a wake-up call for India’s financial sector. While the RBI has been proactive in addressing regulatory lapses, the responsibility for resilience lies with individual banks. Strengthening internal governance, improving risk assessment frameworks, and adopting a consumer-first approach will be key to maintaining the credibility and stability of India’s banking system. Furthermore, implementing structured and committee-driven board governance will be crucial in ensuring that oversight is both detailed and strategic. The coming months will be critical in determining whether IndusInd’s troubles are an isolated event or a symptom of deeper governance failures within the sector.