IndusInd Bank's wake-up call: Why we never recommended it

In a stock market crowded with banks, Value Research Stock Advisor (VRSA) has stood out by recommending only three banks over the years. That's right - just three, out of dozens of listed Indian banks. Why so few? The answer lies in a simple truth: banking is a business built on trust and prudence. We've always believed that flashy growth means nothing if it comes at the cost of transparency and sound risk control. Recent events at IndusInd Bank - a once high-flying lender now reeling from financial skeletons tumbling out of its closet - illustrate exactly why our cautious approach kept this bank off our recommendation list.

Aggressive growth, hidden cracks

For a long time, IndusInd Bank was a darling for growth-focused investors. It expanded its loan book at a rapid clip and proudly reported a 'clean' record on bad loans. As of late 2024, IndusInd's net non-performing assets (NPAs) were under 1 per cent - an enviable metric that suggested excellent credit quality. Many investors saw this as a sign of a high-quality bank and felt fear of missing out (FOMO) on its seemingly unstoppable rise.

However, beneath those glossy numbers lay subtle red flags. In 2021, whistleblowers alleged that IndusInd's microfinance arm had evergreened loans and under-reported NPAs - allegations the bank dismissed as a "technical glitch". Even then, this episode hinted at weak internal controls and a growth-at-all-costs culture. These were exactly the kinds of concerns that kept VRSA from ever recommending IndusInd Bank.

The unraveling: A shocking Q4 FY25

Fast forward to the March 2025 quarter, and the cracks in IndusInd's foundation burst wide open. The bank stunned everyone by reporting a net loss of over Rs 2,300 crore for Q4 FY25 - its first quarterly loss in nearly two decades. This wasn't a routine bad quarter; it was a full-blown reckoning. IndusInd had to wipe the slate clean after uncovering massive accounting discrepancies that had artificially bolstered its books for years.

So, what went wrong? In plain terms, IndusInd admitted it had been mis-stating its financials. An internal audit revealed that years of incorrect accounting for internal forex trades would wipe out around Rs 1,900 crore from its books, and that interest income on microfinance loans was overstated by another Rs 650 crore. In short, profits were puffed up and bad loans hidden. When these lapses were finally corrected, the damage was devastating: net interest income plunged 43 per cent YoY, gross NPAs spiked from 2.3 per cent to 3.1 per cent in one quarter, and the bank swung from a solid profit to a huge loss.

IndusInd's board even said it suspects fraud by certain employees behind these lapses - a shocking breach of trust. The CEO and deputy CEO resigned in April 2025, and the RBI has given the bank until June 30 to propose a new chief executive. Regulators are also probing possible insider trading by those who knew about the problems. In short, the bank is now grappling with a full-blown crisis of credibility.

Fear and loss: When trust erodes

For investors who chased IndusInd's growth story, this was more than just a financial loss - it felt like a gut-punch. The stock price plunged over 25 per cent in a single day - essentially a quarter of its market value wiped out overnight. Even depositors were spooked, as the bank's low-cost CASA deposits fell 5 per cent with customers rushing to pull their money.

This is exactly the kind of nightmare scenario that prudent investors fear - a bank that looked rock-solid turning out to be anything but. IndusInd's once-"clean" NPA record now looks like a mirage. In fact, an internal review found nearly Rs 1,900 crore of bad loans that were never classified as NPAs. The very thing that lured many investors (those improbably low bad-loan figures) was due to aggressive accounting, not superior lending. In the end, FOMO quickly turned into regret for those who had believed the hype.

We at VRSA understand that tug-of-war between FOMO and the fear of getting burned. IndusInd Bank's saga is a sobering example of why we choose caution. We would rather have our subscribers miss a short-term rally than get caught in a meltdown like this. The bank's glossy growth metrics hid risks that we felt were too high. Those risks materialised in the harshest way - a stark reminder that when trust erodes, value evaporates.

What we look for in a bank

All banks are not created equal. The few banks that did earn our recommendation share key characteristics that IndusInd lacked. We don't insist on perfection, but we do demand a level of prudence that acts as a bulwark against exactly the kind of fiasco we just witnessed. Here are a few hallmarks of the banks we favor:

• Prudent growth: They grow steadily and sustainably, not at a reckless pace. You won't see them loosening credit standards just to chase rapid expansion.
  
• Conservative lending: These banks avoid making outsized risky loans or chasing exotic profit sources. Instead, they focus on core lending where they have expertise (often retail and well-vetted businesses), yielding healthier asset quality.
  
• Stringent internal controls: Strong banks invest heavily in compliance and internal audits. Problems are identified and addressed early. We look for a culture of transparency where any lapse is fixed - not hidden until it explodes.
  
• Robust financial metrics: They maintain consistently healthy profitability (high NIMs) and strong buffers (capital and provisions). Even in tough times, these banks stay well-capitalised and prepared for losses.

In short, the banks that make it onto our list have proven they can weather storms without resorting to creative accounting. They've shown long-term efficiency and discipline, rather than chasing every high-yield opportunity. This patient, transparent approach might not generate headlines each quarter, but it builds a franchise that lasts - and that means investors can sleep easier at night.

Coming next week: A New bank joins our elite list

IndusInd Bank's troubles underscore a lesson we've held dear: in banking, prudence pays. This saga validates why VRSA never recommended IndusInd - we sidestepped the hype and helped our subscribers avoid a potential disaster.

Yet there's room for optimism. There are still trustworthy banks out there - and after years of sticking with just three, we're ready to add a fourth. After months of scrutiny and deep analysis, we've zeroed in on a bank that stands out for its clean books, conservative culture, and strong growth potential.

This new bank will be revealed to our subscribers next week.

If you've ever wondered how to identify a truly reliable bank stock—one that combines growth with governance—you won't want to miss this. Our newest recommendation might just become your most dependable long-term wealth creator.

Join Value Research Stock Advisor today and be among the first to access this rare, high-conviction pick the moment it goes live.

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