Sumant Kathpalia should have read the tea leaves long back — the regulator had given enough signals of its discomfort with his leadership of IndusInd Bank at least twice in the past. In March 2023, the Reserve Bank of India (RBI) had reduced his tenure to two years, instead of the three years originally recommended by the bank’s board. Last month, the RBI approved a one-year extension of his term even though the board had recommended a fresh three-year term.
Under his leadership, IndusInd Bank faced several other regulatory challenges. In December 2024, the RBI imposed a penalty on it for failing to adhere to deposit interest rate guidelines, while its probe revealed that the bank had opened savings accounts for ineligible individuals. In July 2022, a fine was imposed for non-compliance with Know Your Customer (KYC) norms. Also, in November 2021, the bank disclosed that it had inadvertently disbursed around 84,000 loans without customer consent due to a technical glitch.
So it was a surprise that Kathpalia took so much time to realise that the regulator “wasn’t comfortable” with his leadership skills. “I don’t know what the RBI’s rationale is to give me (a) one-year extension, but I think they are not comfortable with my leadership skills of running the bank, and we should respect that,” the MD & CEO said in an analyst call on the derivative portfolio impact. In less than two months, he has resigned taking “moral responsibility, given the various acts of omission/commission that have been brought to my notice.”
His resignation comes a day after deputy CEO Arun Khurana stepped down and two days after the bank notified the exchanges that an independent probe by Grant Thornton had found that the derivatives loss had occurred due to incorrect accounting of internal derivative trades by the bank, leading to notional profits and accounting discrepancies.
It was baptism by fire when Kathpalia took over the reins from Ramesh Sobti, another ABN AMRO veteran, at IndusInd Bank in March 2020. The uncertainty around pandemic had already seen the Sensex fall by 37% — from 41,000 points to 26,000 points. Worse still, just a few weeks back, YES Bank’s board had been superseded by the RBI. To be fair, Kathpalia hasn’t done too badly on most parameters. For example, the number of branches to drive retail deposits till FY24 has risen from 1,911 to 3,063 — a rise of 60%. Net profit has doubled from Rs 4,418 crore to Rs 8,950 crore in FY24. The net interest margin at 4.28% in FY24 is more than that of the country’s biggest private sector bank — HDFC Bank’s 3.54% — and similar to ICICI Bank’s 4.32% in FY25. Even gross and net non-performing assets stood at 2.25% and 0.68%, respectively, as of December 2024.
Of course, it lags big banks in retail deposits at 46%. For example, HDFC Bank’s retail deposits are at a whopping 83%. There are also worries about its micro-finance lending book at Rs 32,564 crore. And now the losses due to derivatives misreporting has made things worse.
The profit numbers give the bank comfort that the Rs 1,960-crore loss due to misreporting in the derivatives segment will hurt them for just one quarter. Even the market reacted adversely to the news initially, with the stock falling 27% on March 11. However, it has recovered and is currently down 7% from its pre-disclosure prices. The Sensex and the Nifty are up over 8% during this period.
But clearly the RBI was not impressed. There are other allegations as well. Reports suggest that the Securities and Exchange Board of India is examining trading details of top officials of the bank to ascertain if there was any violation of insider trading rules.
According to stock exchange disclosures, between May 2023 and June 2024, Kathpalia sold 950,000 shares valued at approximately Rs 134 crore, while Khurana sold 550,000 shares to raise around Rs 82 crore. These shares were part of their employee stock option plans. One doesn’t know if there are more skeletons in the cupboard.
Kathpalia, who had been leading the bank since 2020, had been at the forefront of its core executive team for over 12 years. A chartered accountant, he has had over 37 years of experience in large multinational banks like Citibank, Bank of America, and ABN AMRO, where he headed the consumer loans division, before joining IndusInd. The end to such a distinguished career must have hurt him badly. But the serious lapses in the recent past left the RBI with no other option as they have the potential to erode the trust factor. Clearly, Kathpalia and his team could have done better.