Moody’s affirms ratings of IndusInd Bank; places baseline credit assessment under review for downgrade

Moody’s Ratings has affirmed IndusInd Bank Limited’s Ba1 long-term foreign currency (FC) and local currency (LC) bank deposit and issuer ratings, along with its Not Prime (NP) short-term FC and LC ratings. The global rating agency has also affirmed the bank’s (P)Ba1 rating on its senior unsecured medium-term note program and its Ba1 long-term and NP short-term counterparty risk ratings.

At the same time, Moody’s placed IndusInd Bank’s ba1 Baseline Credit Assessment (BCA) and adjusted BCA under review for a potential downgrade. The outlook on the bank’s long-term ratings remains stable.

Discrepancies in derivative accounting raise concerns

The review for downgrade comes after IndusInd disclosed discrepancies in the accounting of derivative transactions conducted over the past five to seven years for hedging its foreign currency borrowings. On March 10, 2025, the bank announced it had appointed an external advisor to investigate the issue and assess its impact, which includes potential mark-to-market losses. The review is expected to be completed within three months.

Moody’s said the affirmation of IndusInd’s ratings reflects its strong capital base, core profitability, and stable funding, which help mitigate near-term risks. However, the review for downgrade of the bank’s BCA highlights concerns over inadequate internal controls, which the derivatives issue has brought to light. The agency warned that this, combined with ongoing stress in the retail unsecured loan segment, could negatively impact profitability, capital, and funding.

Leadership Stability Under Scrutiny

Leadership uncertainty is also a factor. The Reserve Bank of India recently approved a one-year extension for the bank’s Managing Director and CEO, instead of the three years proposed by the board. This, along with the recent resignation of the Chief Financial Officer, adds to concerns around management stability.

Asset Quality Pressures

IndusInd’s asset quality has shown signs of deterioration. The gross non-performing loan (NPL) ratio rose to 2.3% as of December 2024, up from 1.9% in March 2024. This increase was largely driven by rising stress in microfinance and credit card loan segments. Moody’s expects further pressure on NPLs but notes that the bank’s proactive provisioning should help limit the impact on profitability and capital.

Despite these challenges, Moody’s believes the bank’s funding and liquidity remain stable, supported by its domestic franchise and international funding access. A material deterioration in these areas, however, would be credit negative.

ESG Considerations

Moody’s also flagged governance as a key driver of its rating action, assigning IndusInd an ESG Credit Impact Score of CIS-3 and a Governance Issuer Profile Score of G-3. The accounting discrepancies point to weaknesses in risk management, compliance, and reporting—issues that could affect the bank’s reputation, funding, and liquidity if not addressed.

Outlook and Potential Rating Actions

Moody’s said an upgrade is unlikely in the near term given the ongoing review for downgrade. The BCA could stabilize if IndusInd addresses concerns around leadership, financial controls, and risk management, while maintaining asset quality, profitability, and funding stability.

Conversely, a downgrade would follow adverse findings from the derivatives review or significant deterioration in asset quality and capitalization. A sustained rise in credit costs above 1.5% of total assets or a weakening in funding and liquidity could also lead to further rating action.

Also See: IndusInd Bank derivative loss – what happened and what it means