IndusInd bank stocks turned extremely volatile early on Thursday after surging on Wednesday following a nearly 27 percent plunge on Tuesday.

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The decline in IndusInd bank's stock was more pronounced beyond the wider market fall and came after accounting discrepancies in its derivatives portfolio.

IndusInd Bank on Monday said that it has identified lapses in its derivatives portfolio, which may adversely affect about 2.35 per cent of the bank's net value as of December 2024, citing an internal review.

Analysts estimate the shortfall to be Rs. 2,100 crores in absolute terms.

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The issue, which is still under review, could impact the bank's profits in the short term, with the final loss potentially being higher. The bank responded to the accounting error on Tuesday, asserting that it had sufficient reserves and capital to mitigate the issue.

The bank's CEO and managing director, Sumant Kathpalia, said the accounting discrepancy was identified in September-October last year, and the bank sent a preliminary report to the RBI last week.

The real figure will be determined once the external agency designated by the bank completes its study by early April. The management's assurances did not prevent a decline in shares on Tuesday, marking the bank's worst single-day stock decline, shaking investor confidence.

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The bank's shares opened in the green and soon turned red on Thursday after topping Nifty gainers in an extremely volatile Wednesday for broader benchmarks.

Why are bank stocks considered risky?

The sharp fall reignites concerns about the risks of investing in banks. Unlike other businesses, banks operate as highly leveraged institutions, meaning they use borrowed money to lend and invest.

While this can amplify gains, it also increases the risk of losses. A single misstep — whether in lending, trading, or asset management — can have severe consequences, as seen in past banking collapses worldwide.  

History is filled with examples of banks failing due to hidden risks. From the collapse of Credit Suisse to the downfall of Silicon Valley Bank in the US in 2023, banking failures often stem from unexpected weaknesses in credit books, trading portfolios, or bond holdings.

The nature of banking means that negative surprises tend to outweigh positive ones, and problems can remain hidden for years before surfacing.