The IndusInd Bank Crisis, and India's FMCG Landscape in 2025
Personal finance, investment philosophies and fun facts - all without the jargon.
Welcome to the fifteenth edition of the Bodhi Newsletter! In today’s edition, we cover:
The IndusInd Bank crisis explained
India’s FMCG Landscape 2025
The IndusInd Bank crisis explained
By Mahir Shah
Shares of IndusInd Bank fell sharply by 27% on March 11th, the largest ever intraday drop in the bank’s history and the 6th largest intraday drop for any company in the Indian stock market history. The fall resulted in a market capitalization erosion of nearly ₹20,000 crore and nearly wiped out Rs. 7300 Cr from mutual funds. To get a picture of the impact of this share price fall, the company has now given a negative stock return over the last 10 years. If you had invested money in the bank in March’15, you have actually lost money.
Why did this happen?
On March 10, the company disclosed that while doing an internal review of its internal derivatives position, the bank found some accounting discrepancies in its account balances, which will now have an adverse impact of 2.35% of its net worth as of Dec’24. This amount would be around Rs.1500-2000 Crore, which will be written down as a loss in its next quarter. The bank has appointed a reputed external agency to review and validate the internal findings and accurately calculate the exact impact of these discrepancies on the bank’s P&L.
Explaining the whole fiasco:
IndusInd Bank has been increasing the share of its NRI deposits in its book and taking foreign borrowings for the last few years. They offered attractive interest rates to these foreign depositors and used this foreign money to extend loans in India.
Banks, while taking deposits and borrowing money, have interest rate and liquidity risks. When they take deposits and loans from foreign institutions, they take on an additional risk: the currency fluctuation risk or foreign exchange risk. Take the following example:
Bank XYZ has taken a one-year loan of @10% $1000 from an international Bank ABC. At the time of taking the loan, the USD-INR exchange rate was Rs. 87. The bank converts these funds from USD to INR and uses this money to extend loans in India. Therefore, the bank effectively has Rs. 87000 as balance to give out as loans and earn interest from it. One year later, at maturity, the bank has to return the principal amount plus interest in USD (i.e., $1100) to Bank ABC. Assume that the exchange rate has now increased to Rs.90. Therefore, the bank now has to pay Rs.99000 (it would have to pay Rs. 95,700 if the exchange rate stayed constant at Rs.87). Bank XYZ will have to incur this loss due to the currency fluctuation. At the surface level, this seems like a meager amount, but imagine millions of rupees multiplied by hundreds of similar transactions to understand the impact. To insure the bank against these kinds of risks, the bank enters into a currency swap (a hedging instrument) where the two parties exchange currencies at a predetermined exchange rate at the beginning and the end of a contract. This is a very common method used by banks and other financial institutions to insure their funds from foreign exchange risks. So, what went wrong?
What did IndusInd Bank do?
Every bank has an ALM desk (the asset-liability management desk). Their job is to manage the bank’s overall assets and liabilities, including foreign currency deposits. They ensure the banks manage asset liability cash flows, currency fluctuations risks, etc. So, IndusInd Bank’s ALM desk accepts the dollar deposits and takes on a foreign exchange risk. To manage this risk, the ALM desk transfers this risk to the internal trading desk of the company. The trading desk of a bank manages various risks - like the foreign exchange risks - of the bank and executes trades on behalf of the bank to mitigate these risks. Therefore, the ALM desk hands them the foreign currency, and the trading desk in return gives back an equivalent amount in INR. From the above example, we can assume that the ALM desk transferred $1000 to the trading desk and received Rs.87000 from them. This is called an internal derivative trade. At maturity, the ALM desk gives back Rs.87000 to the trading desk (plus some cost) and receives the $1000 from them. The cost for this kind of a currency swap trade is calculated at swap cost, on a historical basis, (i.e. at the pre-agreed exchange rate and interest differential at which the internal deal is settled). The cost stays fixed throughout the agreement and does not change depending upon the exchange rate fluctuations.
Remember that this foreign exchange risk is still within the bank, just across departments. To insure the bank from this risk, the trading desk enters into an external derivative trade with an international bank. This external hedge is an exact mirror of the internal hedge where the trading desk agrees to receive USD and pay INR to the international bank. This locks in the exchange rate and kind of protects the bank from future USD/INR fluctuations. Now, keep in mind that the cost of this external swap is not on a historical basis (i.e. the cost fixed at the time of the maturity), but on a mark-to-market basis. That means that if on the next day the foreign exchange goes against the external hedge of the bank (i.e. if the rupee gains against the dollar), it will have to book the losses on the same day. This will happen throughout the tenure of the agreement and the cost is calculated this way. So, the external trades were calculated on a mark-to-market basis while the internal trade was calculated on swap cost accounting. Therefore, the external department was showing profits due to the dollar strengthening and the internal department was delaying most of the losses due to its historic cost accounting method. At maturity, the gains and losses of each department would almost even out, but the company had unwound a lot of cases before their maturity, i.e., repaying foreign borrowings earlier. This accounting discrepancy between the internal and external desks at the bank led to delayed loss recognition and an overstatement of profits over the years. The bank has been doing these kinds of internal hedges over the last 5-7 years and therefore these delayed losses have surmounted to a huge amount now. But why have they only realized now that they have been understating costs?
In 2023, RBI circulated a directive that said that all banks and financial institutions would have to stop these kinds of internal hedging trades and only deal in external hedging trades which are calculated on a mark-to-market basis. This directive came into effect on April 1, 2024, and that's when the bank started to unwind these internal hedges and that is when this internal process found these accounting discrepancies. The impact of the understated foreign exchange losses and the overstatement of profits all these years has proved to be very adverse for the bank. The impact estimated by the bank would be approximately 2.35% of its net worth as of Dec’24 but to get to the exact amount of this loss, the bank has decided to do an internal review and has parallely hired an external agency to revalidate the exact amount of the losses.
Some Additional Issues:
In Jan 2025, just a few months before this fiasco was unveiled, Gobind Jain, the CFO of the company, resigned from the company. This sparked elaborate rumors and questions that did the CFO resign from the company once he got to know about all of these problems with the bank. More recently, the RBI approved CEO Sumant Kathpalia’s reappointment as MD & CEO for just one year, instead of the three-year tenure the bank had requested. This is the second time that the RBI approved Sumanth Kathpalia's extension by a shorter term than the one sought. In 2023, the RBI had only approved a two-year extension against the three years sought by the board. This indicates that the RBI is concerned with the way the CEO is handling the bank’s operations.
Moreover, the CEO and the Deputy CEO of the bank sold shares worth Rs.157 crores of the company in 2023 and 2024. This kind of insider selling sparked questions on the integrity of the bank’s management and the timely exit they got before the bank’s share price tumble.
The management had found out about the issues regarding the discrepancies and the overestimation of profits over the years in Sept-Oct 2024 but have only made it public in March this year.
What has the management said?
The CEO, Sumanth Katpalia came on an interview with CNBC TV to address all these issues and reassure the depositors and the investors of the company. He said that this is only a one-off thing and is not recurring. It can happen with any bank. He said that the bank is well-capitalized and has a healthy capital adequacy ratio above 15%. He said that he is fully committed to the bank for the next year which the bank has granted and said that all these issues were internally found by the bank and there was no foul play to hide any of these issues from the investors and the public. They got to know about these issues in Oct 2024 but were still not sure about the exact impact of it yet. That is why they waited until they could give an approximate amount of the impact. The RBI also came out with a circular reassuring investors and the public.
What does this mean for the bank?
The CEO said that the company would like to book this loss in the next quarter, i.e., Q4FY25. He said that even with this huge loss being incurred, the company would post profits in the next quarter. The fall in the share price has eroded a huge amount of the market value of the company and the current price-to-book of the bank is ~0.8.
However, investors tend to lose trust in the bank due to all of these problems. Moreover, the additional problems regarding the integrity of the management also raise concerns. The most important thing for an investor while evaluating a bank is its management and their integrity. As the old saying goes “Trust, once lost, is hard to recover”. Only time will tell how the investors and the bank will forget this whole fiasco and continue its operations efficiently.
Here’s the interview of the CEO, the transcript of the management’s concall, and a simplified explainer to understand the issue more deeply.
Small Packs, Big Impact: The FMCG Landscape 2025
By Rajit Mundhra
Fast Moving Consumer Goods (FMCG) consist of essential products like biscuits, soaps and sugar, which cater to daily consumer needs. These products have high turnover rates, with some being consumed within a day. Due to their essential nature, there is consistent demand for FMCG products. Britannia, Dabur and Hindustan Unilever (HUL) are some large companies in this sector. These companies sell several products under different brand names. For instance- HUL sells soap under Dove and shampoo under Clinic Plus.
The Indian FMCG sector is estimated to grow at a 15% CAGR, reaching $665 billion by 2032. In addition to this, the government is incentivizing domestic manufacturers along with adding heavy import duties. Union Budget 2023-24 has allocated US$ 976 million for PLI schemes. This will improve the competitiveness of domestically produced goods, increase domestic capacity and promote exports. The FMCG sector is entirely dependent on consumer demand, be it domestic or international. This sector will prosper significantly with a rise in rural expenditure, resulting in high revenue growth for FMCG firms. The Union budget for 2024-2025 focused on reviving demand in tier 2 and tier 3 cities. The government has boosted support for farms, rural infrastructure and connectivity to create long-term jobs.
Another driving factor for the FMCG Sector is Quick Commerce. QC giants like Zepto, BlinkIt and Swiggy Instamart have transformed the FMCG sector. Delivering FMCG items in 10 minutes at one’s doorstep has increased the demand significantly. Quick commerce itself has led to significant revenue growth. Quick commerce accounted for more than half of Nestle India's 38% e-commerce growth in Q2 FY25. Quick commerce was the main source of Adani Wilmar's ₹3,000 crore in revenue from other sources. In the future, it will also lead to an increase in the companies' profit margins.
What about the next 6 months?
The RBI is set to cut Interest rates by 50 Bps in the first half of 2025. As explained in my previous article, an interest rate cut leads to an increase in disposable income for the consumers. This will increase the demand for FMCG products thereby increasing revenues in the coming quarters. An interest rate cut will also help FMCG companies improve PAT margins inflating their valuations.
But how can one invest in the FMCG Sector?
There are several Mutual Funds and ETFs that invest in the FMCG sector. For example- ICICI Prudential Nifty FMCG ETF invests in the FMCG Sector. In the past 3 years, it has outperformed benchmark indexes- Nifty50 and The Sensex by a big margin as we can see in the graph below.
Conclusion
This sector also enjoys high barriers to entry. It takes several years to reach a high scale, margin and quality to be able to compete with the current big giants. The sector demands substantial investment in production, distribution and marketing. For instance, Dabur has invested over ₹1,000 crore in brand building and expanding its distribution network in the last few years.
Building a nationwide scale requires years of investment and strategic partnerships. Additionally, established brands enjoy high customer loyalty, which can be hard for new brands to overcome. However, the growing demand for products like organic food, natural skincare and sustainable packaging is valued at ₹5,000 crore in the organic segment. This presents opportunities for new players targeting niche, underserved markets.
