RBI scrutiny on IndusInd Bank: Buried in the Details

Indusind bank has been on the Reserve Bank of India’s (RBI’s) radar for a while now. In March 2025, IndusInd Bank revealed that its derivatives portfolio had been overvalued by $175 million (Rs 1,450 crore) due to non-compliant internal transactions. The announcement triggered a sharp decline in its stock price.

In 2023, Sumanth Kathpalia, the bank’s managing director (MD) and chief executive officer (CEO) got a shorter two-year extension from the RBI. Speculation was rife that Mint Road may not oblige with another extension, especially after the bank’s chief financial officer (CFO) Gobind Jain resigned on January 17. In early March, Mint Road gave him another one-year lifeline, despite the board requesting a three-year appointment.

The bank’s board backed its CEO, but the regulator thought otherwise. A limited extension for the CEO, a CFO’s sudden exit, and a watchful regulator, the signals were flashing red.

Now, with questions of governance, compensation, and potential penalties looming, the scrutiny is only deepening.

In May 2023, then-Governor Shaktikanta Das and his top aides addressed the boards of state-run and private banks. The issues discussed were “governance, ethics, the role of the boards, and supervisory expectations.” A second edition, with the boards of private banks only, took place on November 18 last year.

Yet, despite these engagements, IndusInd Bank has found itself at the centre of regulatory concerns.

While the RBI never gives the reasons for curtailing a bank’s boss’ tenure, there appears to be a marked difference in the reading of the situation between IndusInd Bank’s board and Mint Road. “It can’t be that board members are for Kathpalia’s re-appointment as the bank’s head twice over for a three-year stint, and the RBI declines the proposals,” said a source who refused to be identified, given the sensitivities involved.

Governor Das highlighted that a bank’s MD and CEO must operate under board supervision while maintaining independence in decision-making. IndusInd Bank board’s backing of Kathpalia suggests that both agreed on the way the bank was being run. Mint Road did not see it quite that way.

The unfolding situation at IndusInd Bank also brings a renewed focus on RBI’s 2019 guidelines on the compensation of whole-time directors/chief executive officers/material risk takers and control function staff. It covered state-run banks but spelled out the terms of remuneration, stock options, and clawback provisions, in case of governance failures.

The first major test of these rules came in March 2020, when RBI explored clawbacks against Yes Bank’s former leadership. A similar review followed for ICICI Bank’s Chanda Kochhar in 2018 over related-party transactions involving her husband.

Could IndusInd Bank’s top brass now face the same scrutiny?

Though the guidelines formally apply to pay cycles beginning April 2020, RBI retains the authority to impose retrospective penalties for past lapses, meaning IndusInd’s leadership isn’t necessarily in the clear.

Beyond leadership concerns, the IndusInd Bank case could mark a shift in RBI’s enforcement approach. Following then-governor Das’ meeting with all bank boards, RBI had initiated a review of its penalty framework. The regulator wanted to establish a scale-based enforcement system that links fines imposed to the size of the regulated entity (RE).

Historically, RBI’s penalties have been relatively modest. A penalty of Rs 58.9 crore on ICICI Bank in 2018 was the highest, on record. When seen against the backdrop of penalties imposed by global banking regulators, which can run into hundreds of millions of dollars, the sums imposed in India are modest.

The report on Trend and Progress of Banking in India 2023-24 found that instances of penalty imposed on REs increased during this period across bank groups, except foreign banks and small finance banks. The total sum more than doubled to Rs 86.1 crore involving 281 REs compared to Rs 40.4 crore and 211 REs in 2022-23.

While RBI has said that IndusInd Bank’s financial health remains stable, the very need for such a statement suggests deeper concerns. With questions around governance, leadership, and regulatory penalties still unfolding, the coming months could be crucial for the bank’s future.