How IndusInd's push for profits and lax controls drove it to a crisis

IndusInd Bank ignored established Indian derivative accounting practices for years as it chased profit growth, resulting in a $175 million balance-sheet hole and the biggest crisis for the lender in its three-decade history, multiple sources said.

Still, the 2.35% shortfall in the net worth of India's fifth-biggest private sector lender may not have come to light last month had the rupee not sharply slumped recently, said the sources.

IndusInd disclosed in March accounting discrepancies in its derivatives portfolio whose impact roughly equated to an entire quarter's profits and sparked the loss of about one-fourth of its market value.

In the aftermath, the country's central bank, the Reserve Bank of India (RBI), has asked the CEO of the bank and his deputy to step down as soon as replacements are found and approved by it, Reuters reported last month, citing sources. IndusInd has denied any such push from the RBI.

While India is not new to crises at banks, the IndusInd debacle underscores the risks to them from complex derivative transactions and to the financial system from sudden and sharp moves in the currency, while also raising questions about the robustness of bank board controls.

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Reuters pieced together the sequence of events that led to IndusInd's crisis by speaking to more than a dozen people, most of whom had direct knowledge of the matter or were aware of the RBI's thinking.

At the heart of the controversy is the bank's long-term foreign currency deposits, which include funds denominated