Rating Rationale

Detailed Rationale

Crisil Ratings' on the long-term debt instruments of IndusInd Bank Limited (IndusInd) continues to be on ‘Rating Watch with Negative Implications’. The short-term debt instruments is reaffirmed at ‘Crisil A1+'

The long-term rating was placed on ‘Watch Negative’ on May 7, 2025, following the resignation of top two managerial personnel as well as disclosure of a review being conducted on the bank’s microfinance business by an internal audit department to examine few concerns, brought to attention during finalisation of accounts. Earlier, on March 10, 2025, the bank had disclosed discrepancy in the accounting of derivatives.

On May 21, 2025, the bank announced its annual results for fiscal 2025 and disclosed various accounting issues, which had a significant impact on profit. With respect to accounting of derivatives, the bank has reversed other income by Rs 1,960 crore, following the findings of an external agency and the Board-appointed independent professional firm. In addition, the bank noted incorrect recording of interest income and fee income in its microfinance business over the first three quarters of fiscal 2025, and misclassification of certain loans. These factors have led to under-provisioning and additional non-performing assets (NPAs) aggregating to Rs 1,885 crore. The bank has made provision of 95% towards these accounts and has also reversed interest on these NPAs accounts of Rs 178 crore. Moreover, higher slippage was seen in the microfinance business. Additionally, the bank also reversed income of Rs 423 crore (net of interim provisions and accrued interest) towards accounting error. Furthermore, it has reviewed groupings and classification of the profit & loss (P&L) items and set off unsubstantiated increase in other assets and liabilities, despite nil impact on the P&L. The bank has reported an operating loss of Rs 491 crore and a loss of Rs 2,329 crore in the last quarter of fiscal 2025. Thus, net profit was reported at Rs 2,575 crore for fiscal 2025. However, pre-provisioning profit was healthy at Rs 10,661 crore in fiscal 2025.

Crisil Ratings understands that the Board has indicated that all financial impacts, outside the normal course of business, have been factored into the results of fiscal 2025. Moreover, the Board and its committees are working with the management and external advisors to reduce manual intervention in various processes and tighten internal controls. Also, in order to reinforce the governance and compliance culture, the Board has also taken a serious stance with respect to staff accountability across levels. Crisil Ratings will monitor and engage with the management to understand progress with regard to steps taken towards strengthening internal financial controls.

With respect to key managerial personnel, following the resignation of Mr Sumant Kathpalia, Managing Director and Chief Executive Officer (CEO) and Mr Arun Khurana, Whole-time director (Executive Director) and Deputy CEO, the Reserve Bank of India (RBI) has advised the bank to submit proposals for appointment of the new CEO by June 30, 2025. While the selection process is at an advanced stage, induction of new senior management personnel and stability of other key managerial personnel will remain a key monitorable. Any further changes in the senior management will also be a key monitorable. In the interim and as approved by the RBI, the Committee of Executives (CoE) is overseeing operations of the bank, so as to ensure business continuity. The CoE is guided by an oversight committee of the board, comprising the Chairperson of the board, the risk management committee, the compensation, nomination & renumeration committee and the audit committee.

Crisil Ratings notes that there has been a limited impact on business operations so far. During the last quarter of fiscal 2025, disbursements for vehicle loans (constituting ~28% of overall advances as on March 31, 2025) saw steady growth of nearly 2% quarter-on-quarter at Rs 12,273 crore. The microfinance business (~9% of overall advances) also showed signs of stabilisation with disbursements up by 1.4% in the last quarter. However, asset quality challenges in MFI may persist for a few quarters. Other retail assets also maintained the growth momentum. However, the corporate loan book has shrunk by 16% quarter-on-quarter in the last quarter in line with the short-term growth strategies adopted by the bank. Continuity of business operations remains a key monitorable.

With respect to the liability franchise, the bank had deposits of Rs 4.11 lakh crore and CASA (current account and saving account) ratio stood at 32.8% as on March 31, 2025, as against Rs 4.09 lakh crore and ~34.9%, respectively, as on December 31, 2024. However, there has been some outflow in deposits from retail and small business customers during this period. These deposits stood at ~Rs 1.85 lakh crore as on March 31, 2025, as compared to ~Rs 1.89 lakh crore as on December 31, 2024. The bank has maintained excess liquidity to take care of any contingencies. During the last quarter of fiscal 2025, average liquidity coverage ratio (LCR) was healthy at 118% and surplus liquidity at Rs 39,600 crore. Furthermore, Crisil Ratings understands there has been no material outflow in overall deposits over the last one month, but will continue to monitor the deposit profile of the bank over the near term.

Crisil Ratings also understands from the management that these are one-time adjustments and no further financial implications of any manner are envisaged on account of lapses in internal financial controls. Further, capitalisation remains healthy even after absorbing these hits, as reflected in the overall capital adequacy ratio (CAR) of 16.24% as on March 31, 2025. Crisil Ratings has also taken note of the statement released by RBI on March 15, 2025, stating that the bank is well-capitalised and its financial position remains satisfactory.

Nevertheless, the rating remains on ‘Watch with Negative Implications’ as Crisil Ratings will continue to monitor the impact of recent developments on business operations of the bank. Any material impact on business continuity, arising from changes in the senior management, and sustained weakening in asset quality and/ or earnings profile as well as sustained outflow in deposits remain key rating sensitivity factors for resolution of the rating watch.

The ratings continue to reflect the healthy capitalisation of the bank, with a high core equity ratio and comfortable pre-provisioning profitability. However, these strengths are partially offset by a modest resource profile and higher cost of deposits. Also, overall asset quality remains a key monitorable following an increase in gross NPAs (GNPAs) during the last fiscal.