India bank mess crystallises perils of competition

RBL Bank

30/04/2025 13:00

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Shritama Bose

MUMBAI, April 30 (Reuters Breakingviews) - Casualties are piling up in India's war for bank deposits. The CEO of $8 billion IndusInd Bank INBK.NS stepped down on Tuesday after accounting and lending woes nixed almost half its market value. The shambles is the most high-profile fallout of the banking industry's intense fight for low-cost funds in the country that has wrong-footed executives, shareholders and watchdogs.

Sumant Kathpalia is trying to distance himself from the mess caused on his watch, which includes rising losses on microfinance loans. He is resigning, he said, to take "moral responsibility" for a derivatives lapse that shaved 2.27% off the bank's net worth when it came to light a month ago. His deputy also stepped down on Monday.

The Reserve Bank of India had insisted on the exits, Reuters reported. But the regulator was initially intending for the lender to find replacements first, which is why it approved a one-year extension to Kathpalia's tenure just last month.

The saga bears the markers of perverse incentives. At the heart of the controversy is IndusInd's long-term foreign currency deposits, which it converted to rupees to fund loan growth without fully accounting for mark-to-market losses. The practice, which stretched back at least six years, effectively inflated profits.

The RBI ushered in new accounting rules for internal derivatives trades in April 2024. Nonetheless, repeated instances of governance crises and RBI action at private lenders from Yes Bank YESB.NS to RBL Bank RATB.NS point to the limits of regulatory effectiveness in an environment of fierce competition.

India's 33 banks are locked in a battle for low-cost deposits. Private lenders, the product of India's 1990s liberalisation, have to compete with state-owned peers which are generally regarded as safer.

There's a newer rival, too: Indians' blooming hopes of making more money by putting their cash into stocks and mutual funds. Bank deposits accounted for 44% of overall household financial assets in March 2024, down from 56% in 2020. The drop, coupled with steady loan growth, has driven banks to increasingly tap short-term debt and attracted health warnings from the RBI.

Management overhauls can hold out hope of a fresh start. But the war for deposits may yet claim more casualties.

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CONTEXT NEWS

IndusInd Bank on April 29 said its Managing Director & CEO Sumant Kathpalia had stepped down from his role. Kathpalia claimed "moral responsibility" in his resignation letter for an accounting lapse that shaved 2.27% off the bank's net worth.

With the Reserve Bank of India's approval, the lender's board has set up a committee of executives to oversee its operations either for three months from the date of Kathpalia's exit or until a new chief assumes charge, whichever comes first, IndusInd said on April 30.

Graphic: Bank deposits account for less than half of Indians' financial assets https://reut.rs/3ELuRxK

 (Editing by Antony Currie and Ujjaini Dutta)

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shritama.bose@thomsonreuters.com))