The IndusInd Bank share crash holds many lessons: Most of all for RBI

Subscribe to enjoy similar stories. The biggest single-day fall in the price of IndusInd Bank shares on Tuesday, 11 March, wiping out more than a quarter of its market value, raises a number of questions. The sharp sell-off followed the lender’s disclosure of accounting discrepancies related to its derivative trades, triggering a spate of analyst downgrades.

The fact that the banking sector’s regulator, the Reserve Bank of India (RBI), chose to approve only a one-year extension for the bank’s CEO, rather than the three years sought by its board, and that too without explaining why, did not help matters. Fortunately for IndusInd Bank and for our banking system at large, the panic was contained to the stock market and the bank’s investors. Its depositors did not react in the same knee-jerk fashion.

So, even as IndusInd’s stock fell 27% to close at ₹656 on 11 March, erasing about ₹19,000 crore of its market capitalization, there was no run on the bank. Clearly, investor trust, which rides on the credibility that a lender commands in capital markets, has proven more fickle than depositor trust. Part of the reason for this is that investors have no backstop.

They have no choice but to take a hit when share prices fall, while depositors count on RBI to ensure their deposits are safe. Given how closely banks are interlinked, we should be thankful that there seems no sign of any systemic risk to the banking system and financial stability is not at threat. Yet, the IndusInd stunner is a wake-up call on several fronts.

First, banks need to improve internal controls. Second, RBI must improve the quality of its inspections. And third, the regulator must assure us both greater transparency and prompt action.