Why is IndusInd Bank’s CASA ratio a red flag?

In its fourth quarter and FY25 results, IndusInd Bank reported a decline in its CASA ratio from 38% last year to 32.8% this year. A decline in this ratio is concerning when the absolute deposits have also fallen, and that is what has happened with IndusInd Bank.

Its CASA deposits have fallen from Rs. 1.46 lakh crore last year to Rs. 1.35 lakh crore this year. It is worrisome because:

• It indicates that customers are increasingly doubting the bank’s ability to recover from the accounting irregularities it reported in March 2025.
• Both current account and savings account deposits have fallen. Customers across the board are panicking.
• CASA is the cheapest source of funds for any bank. The bank can borrow from the RBI at 6.25% because that is the repo rate. CASA deposits, on the other hand, cost a bank 4% or less. You make less than 3-3.5% on your savings account. Most banks don’t pay anything on a current account. So, the cheapest source of funds is diminishing for the bank.
• When CASA declines, banks usually start offering higher interest rates on savings accounts and fixed deposits. This hurts the bank’s net interest margin and, thus, its profitability.

On the brighter side, Indusind’s liquidity coverage ratio, or LCR, has improved from 118% last year to 139% this year. But is it really a relief?

• LCR is the minimum amount of high-quality liquid assets a bank must maintain to meet its short-term (30-day) cash obligations. In a stress scenario, if customers want their deposits back, the bank must have enough liquidity to meet all withdrawal demands for at least 30 days.
• It is nice that the bank’s LCR has improved, but how did it improve despite a decline in CASA?
  A decline in CASA means the bank witnessed a heavy cash outflow. To keep its healthy cash and liquidity position intact and improve it further, perhaps the bank moved its investments from growth assets to low-yield, high-quality assets. Perhaps the bank will also slow down its lending activities.
• To top it up, if Indusind Bank were to raise fresh debt, investors will demand higher yields to compensate for the heightened perceived risk

All of these numbers point to a possible shrinking of net margins. Thinner net margins usually translate to thinner profits.

Then there are the NPAs. Indusind’s gross NPAs shot up to 3.13% in March 2025 from 1.92% a year earlier. In an internal review the bank identified that it had been carrying certain microfinance loans of roughly Rs 1800 crores as standard assets while they should have been NPAs. Is it possible that a stricter audit into accounting lapses led to a more proactive identification of NPA accounts?

But it is not just numbers that have caused discomfort among Indusind Bank’s customers and investors. What began as a disclosure of discrepancies in March 2025 has since become a Pandora’s box of woes, ranging from misreporting and accounting lapses to leadership instability.

• Indusind first reported discrepancies in how two divisions of the bank were reporting the same types of transactions differently. It expected an impact of roughly 2.35% on its net worth and hired an external auditor to ascertain the exact impact. Grant Thornton, the external auditor, confirmed losses of similar magnitude.
• Citing accountability, the CEO and Deputy CEO resigned from their positions. So the bank is now undergoing a senior management overhaul.
• As the audit continued, the board identified Rs. 674 crores as incorrectly recorded interest income in the first three quarters of FY25. This was apparently corrected on 10 January 2025 but reported on 15 May 2025, over four months later. Insiders basically sat on material public information for four months before disclosing it to the public.
• SEBI is probing a few officials of IndusInd Bank for possible insider trading.
• That is not all, the bank’s board also identified Rs. 595 crores in unsubstantiated claims following a whistleblower complaint. And most recently, it flagged a suspected case of internal fraud in its microfinance unit, with Rs. 172.58 crores wrongly recorded as fee income.

Despite the first ever quarterly loss in 18 years, Indusind closed FY25 with an annual profit. The balance sheet remains healthy despite a 99 bps drop in its capital adequacy ratio from 17.23% last year to 16.24% this year.

It is unclear whether to appreciate the bank’s forthcoming stance on all irregularities it is spotting or to condemn it for letting so many irregularities go unnoticed for years.