Why Analysts Expect More Pain for IndusInd Amid Grant Thornton’s Bombshell Findings

Just days after crisis-hit IndusInd Bank’s CEO Sumant Kathpalia and Deputy CEO Arun Khurana resigned, a new report has surfaced alleging that one of them was aware of the incorrect accounting of derivative trades that led to a Rs 1,959 crore hole in the bank’s books. The report comes as analysts covering the private lender expect further business disruptions for the Hinduja Group-owned entity.

Both executives resigned after the forensic audit report by Grant Thornton was submitted to the board on April 27. The bank had appointed the auditor on March 20 to identify the root cause of the discrepancies, assess the correctness and impact of the accounting treatment of derivative contracts, and establish accountability.

What Did Grant Thornton Find?

According to a Mint report, the auditor’s findings revealed that outgoing Deputy CEO Arun Khurana was aware of the incorrect accounting practices but failed to act, despite red flags raised by the finance department. The report cited mismatched accounts during interviews with bank officials, past email trails, and pointed to flawed processes in place prior to the April 2024 RBI guidelines.

Khurana had served at IndusInd Bank since November 2011 and was appointed Deputy CEO in April 2020. During his tenure, he oversaw several key divisions including the Global Markets Group (GMG), Transaction Banking, and Investment Banking. Prior to joining IndusInd, he had worked at HSBC and ABN AMRO.

In January 2025, Khurana also took on the additional role of Chief Financial Officer (CFO) following the resignation of Gobind Jain.

Earlier IndusInd Bank told the stock exchange that external auditor Grant Thornton had determined the cumulative adverse accounting impact on its profit and loss account at Rs 1,959.98 crore as of March 31—similar to the amount disclosed on April 15 after PwC submitted its own report.

The bank added that it will appropriately reflect the impact of these discrepancies in its FY2024–25 financial statements and take steps to strengthen internal controls.

“The report identifies incorrect accounting of internal derivative trades, particularly in cases of early termination, which resulted in the recording of notional profits, as the principal root cause of the discrepancies,” the bank noted, adding that the auditor also examined the roles and actions of key employees.

A day after the report was released, Khurana resigned.

“Considering the recent unfortunate developments, wherein the Bank determined an adverse accounting impact on P&L due to incorrect accounting for internal derivative trades, and given my oversight of the Treasury Front Office function, as Whole Time Director, Deputy CEO and part of the senior management of the bank, I hereby resign, effective immediately,” he wrote in his resignation letter.

More Disruption Ahead

Following Khurana’s exit, IndusInd Bank CEO Sumant Kathpalia also resigned, taking “moral responsibility” for the fallout.

The bank’s board has now appointed a two-member committee to oversee operations while searching for replacements. An earlier Economic Times report had indicated that the board, led by Sunil Mehta, had already hired a headhunting firm in March to find Kathpalia’s successor.

However, analysts say the string of high-level exits adds to concerns about delays in IndusInd’s recovery, potential business disruption, deposit outflows, and deteriorating asset quality. Some warn that appointing a public-sector banker as the new CEO may not be ideal.

“While recent hiring trends in private banks have favoured candidates from the public sector, it’s hard to tell if this was the only viable option for the search committee. However, it is crucial to strike a balance, as such choices may slow the organisation’s response time and create internal friction,” Kotak Institutional Equities said in a note on April 30.

It added that bringing in a public sector banker could lead to higher-than-anticipated attrition and prolong the road to normalcy.

“The CEO’s resignation has derailed hopes of a smooth transition and raised the risk of an RBI nominee being appointed to the board or a PSU banker becoming CEO. Even if a private banker is appointed, we believe the recovery process will take time, as the new leader would need to rebuild the team and risk-management practices before driving growth,” said Emkay Global Financial Services in a note.

While Kotak expects a new CEO to be appointed "soon," Emkay anticipates a delay of at least three to six months.

“Historically, other executive directors have taken temporary leadership roles, but currently, there are no senior management members from IndusInd Bank on the board,” Kotak added.

Issues IndusInd Bank May Face

Although the incumbent MD & CEO and the board have assured a smooth transition and no further surprises, Emkay warned that “business would be hit in the interim and the recovery process prolonged” until a new leader is appointed.

“Following the one-year term extension for the CEO and the derivative-related discrepancies, IndusInd Bank witnessed a meaningful retail deposit run-down, prompting RBI assurances and forcing the bank to mobilise high-cost funds,” the brokerage said.

It added that “recent noise around microfinance (MFI) portfolio discrepancies” and the resignation of the entire top management— including the CEO—could trigger another round of deposit withdrawals, affecting credit growth, margins, fees, and loan loss provisions (LLP).

IndusInd’s asset quality has deteriorated in recent quarters, with its gross bad loan ratio rising to 2.25% from 1.9%, largely due to pressure in the MFI segment. The bank is also facing challenges from regulatory changes in Karnataka and expected new rules in Tamil Nadu—both key markets for its MFI business. These could lead to further defaults and higher provisioning, the brokerage noted. Additionally, ongoing investigations into the MFI portfolio could further impact loan quality and profitability.

However, Kotak remained more optimistic, noting that “similar situations have occurred in the recent past, and many of these concerns have not materialised, except in a few instances (Yes Bank episode).”