IDFC First Bank to repay Haryana govt ₹590 cr soon after branch fraud case

RBI Gov says issue not systemic; bank term it an isolated incident

IDFC First Bank has informed the Haryana state government that it will pay the unreconciled amount of ₹590 crore as soon as possible, following a meeting between the bank’s top management and senior bureaucrats of the state, sources told Business Standard.

 

On Sunday, the private sector lender reported a fraud of ₹590 crore in one of its branches in Chandigarh related to the state government’s account. The issue came to the fore after one of the state government departments sought to close its bank account with IDFC First Bank and transfer the funds to another bank. However, the amount mentioned by the department did not match the balance in the account. The bank has now assured the state government that it will pay the difference, likely tomorrow.

 

In a concall to analysts in the morning, the management said they are very sensitive to all government accounts, as much as with end customers. They added that they will own it up, including making the payment.

 

The bank has termed the fraud an isolated incident. RBI Governor Sanjay Malhotra also assured that there was no systemic issue.

 

“As a policy, we do not comment on any individual bank or regulated entity. We are watching the development. There is no systemic kind of an issue over here,” Malhotra said during the press conference after the central bank’s board meeting in New Delhi.

 

Shares of IDFC First Bank plunged nearly 20 per cent intraday but pared some losses to end at ₹70.04, down 16 per cent — its steepest fall since the Covid period — wiping out more than ₹11,000 crore in market capitalisation.

 

During the analysts’ call, the bank’s management said it will make explicit customer confirmation mandatory for branch-based transactions above a predefined threshold, with such confirmation to be obtained through a verified digital channel. This will be in addition to the various checks and balances the bank already has in place for high-value transactions.

 

The management highlighted that deposits of the Haryana government constitute around 0.5 per cent of the bank’s overall deposits of ₹2.82 trillion. Since the incident, around ₹200 crore outflow has taken place from the Haryana government’s deposits. Overall, state and central government deposits constitute 8–10 per cent of the bank’s deposit base.

 

The management said it will deploy artificial intelligence (AI) to carry out the initial verification of cheque signatures, after which the signatures will be double-checked by a human as opposed to the current system.

 

The bank’s management assured that this was an “isolated” incident arising from alleged collusion between certain employees and external parties, with the employees transferring funds to beneficiaries outside the bank. The bank clarified that the personnel involved have been suspended. Additionally, regulators and auditors have been informed of the matter; police complaints filed, and law enforcement agencies are being engaged to investigate the matter.

 

The bank has already engaged KPMG to conduct a forensic audit of the matter, which is expected to give its report in the next four to five weeks.

 

According to V Vaidyanathan, MD & CEO, IDFC First Bank, the immediate step the bank is taking to add a layer of security for confirming high-value transactions is the introduction of an explicit system of confirmation for such transactions.

 

“For transactions exceeding a predefined threshold, we will take mandatory confirmation from the customer. This confirmation will be captured through a verified digital channel within a stipulated time window,” he said.

 

He highlighted during the analyst call that currently the bank has strong controls in place, but they failed in this case because of collusion between certain employees and external parties.

 

The bank said that initially the discrepancy found was ₹490 crore, but through reconciliation it found a further discrepancy of ₹100 crore, so the total impact came to ₹590 crore. “We have put out this number as we could best assess at this point of time. But we feel that the number is broadly appropriate to the current situation. We do not anticipate this to broadly move from here on to a great extent,” the management clarified on the call.

 

“We will spare no one. And we have quickly moved in. We have appointed a forensic auditor for this — KPMG. And we expect them to act with great diligence and move very fast. And we will take the full support of the law enforcement of the country,” Vaidyanathan said, adding that the money has gone to many other banks in the system, and those banks are cooperating in the process.

 

On February 18, the Haryana state government de-empanelled IDFC First Bank and AU Small Finance Bank for government business in the state. “Regarding the de-panelment, that is a natural reaction from the counterparties. It is our responsibility to do better, provide necessary assurances, and get back into the game. We will win back the confidence of that client,” he said.