IDFC First Bank fraud puts spotlight back on governance gaps in pvt banks

Large banks to gain post Haryana de-empanelment of IDFC First, AU

In the last one year, two private banks have been hit by fraud, though of different natures. In March last year, Indusind Bank reported around ₹2,200 crore in accounting lapses, first in its derivative book and then in the micro loan portfolio.

 

Now, another private sector lender, IDFC First Bank, has disclosed a fraud of ₹590 crore related to government deposits in one of its branches in Chandigarh. The discrepancies came to notice 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.

 

Meanwhile, the Haryana government, on February 18, said it has de-empanelled IDFC First Bank and AU Small Finance Bank (SFB) for government business. The state government accused certain banks of inflicting financial loss as the finance department found that these banks parked funds in low-interest savings accounts instead of transferring them to higher-interest fixed deposits (FDs) or flexible deposits as per prescribed instructions.

 

“While the issue appears localised, it raises concerns around governance and branch-level controls,” Nomura said in a report.

 

“In deposit-linked frauds, banks usually protect depositors and recognise the loss through P&L (profit and loss) once the fraud is established, leading to high/often full provisioning, whereas recoveries, if any, are generally back-ended,” the Nomura report said, adding that they await clarity on the quantum of potential loss, recoveries, and provisioning stance.

 

The Mumbai-based lender, IDFC First Bank, has appointed KPMG for a forensic audit, which is expected in four-five weeks.

 

“We believe that investors, regulators and, in general, the banking system will need to focus more on governance and controls as these issues have assumed greater importance,” Macquarie said in a report.

 

According to Nomura, the amount under reconciliation, ₹590 crore, could impact the common equity tier-1 (CET1) by 19 basis points (bps), which was 14.23 per cent as on December 2025.

 

Broking firm IIFL said IDFC First Bank has deposits of ₹19,800 crore (6.8 per cent of total deposits) in Haryana, and the de-empanelment would lead to outflow of ₹2,000 crore.

 

“The fraud amounted to ₹590 crore (3 per cent of deposits in Haryana). Assuming 10 per cent of deposits in Haryana are from the government accounts, it would lead to a potential outflow of ₹2,000 crore (0.7 per cent of total deposits),” IIFL said.

 

Similarly, AU SFB has deposits of ₹9,000 crore (6.5 per cent of its total deposits) in Haryana. Assuming 10 per cent of deposits in Haryana are from government accounts, it would lead to a potential drawdown of ₹900 crore, that is 0.65 per cent of total deposits, IIFL said.

 

Public sector banks (PSBs) are set to gain from the de-empanelment of these two private banks, analysts said.

 

“There will be greater scrutiny of government deposits in private sector banks, and some deposits could move to PSU banks over the medium term, particularly affecting CASA (current and savings account),” the Macquarie report said.

 

Post-Covid, CASA ratios of banks have come under pressure, which declined 500-600 bps from peak levels.

 

“Potential beneficiaries from this deposit outflows at IDFC First and AU SFB could be PNB (SLBC convenor of Haryana) and other PSU banks like SBI, Canara, Union Bank, and private banks like HDFC, ICICI, and Axis,” IIFL Capital said.