RBI sees no 'systemic risk' in ₹590-crore IDFC First Bank fraud; lender expects limited hit to Q4 profits

Reserve Bank Governor Sanjay Malhotra on Monday said there was no systemic concern arising from the ₹590-crore fraud reported by IDFC First Bank.

“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 issue,” Malhotra told reporters after Finance Minister Nirmala Sitharaman addressed the Central Board of Directors of the RBI in the customary post-Budget meeting.

IDFC First Bank on Sunday disclosed a ₹590-crore fraud involving accounts of the Haryana government at a branch in Chandigarh.

In a regulatory filing, the private lender said it had informed the banking regulator and lodged a police complaint.

“Prima facie, unauthorised and fraudulent activities have been carried out by certain employees at a particular branch in Chandigarh in a specific set of Haryana state government accounts and potentially involving other individuals/entities/counterparties,” the bank said.

The lender clarified that the matter is confined to a specific group of government-linked accounts operated through the Chandigarh branch and does not extend to other customers.

According to the filing, discrepancies first surfaced when a Haryana government department sought closure of its account and transfer of funds, followed by similar issues flagged by other state entities from February 18 onwards.

The aggregate amount under reconciliation across the identified accounts is approximately ₹590 crore.

Four officials working for the IDFC First Bank have been placed under suspension pending investigation, the bank said, assuring strict disciplinary, civil and criminal action against the employees and other external individuals responsible.

As a recovery measure, IDFC First Bank has sent "recall request" to certain beneficiary banks to "lien mark balance" in suspicious accounts held in these banks, the exchange filing said.

Meanwhile, the Haryana government has de-empanelled IDFC First Bank and AU Small Finance Bank for government business with immediate effect, directing all departments to transfer balances and close accounts maintained with the two lenders.

AU Small Finance Bank has denied any wrongdoing.

“No government funds shall henceforth be parked, deposited, invested or transacted through these banks,” the Finance Department said in a circular, also flagging lapses by several banks in adhering to fixed deposit instructions.

All departments and PSUs have been asked to complete reconciliation of bank accounts by March 31 and submit compliance reports by April 4.

Impact on Q4 profit

IDFC First Bank Managing Director and Chief Executive V Vaidyanathan said the fraud was the result of collusion between employees and external parties, carried out through forged physical cheque transactions.

In a specially convened call for investors and analysts ahead of opening of the equity markets, Vaidyanathan said the issue was limited to one branch and one client group.

He said the bank will take some provisions as a result of the fraud and in line with its policies to recognise any stress upfront.

However, the same is unlikely to have a major impact on profits, he said, pointing out that wider net interest margins and credit costs will be of help.

"So, on a standalone basis, we were expecting a very solid Q4 in terms of profitability," Vaidyanathan said.

IDFC First Bank had reported a 48% jump in net profit to ₹503 crore for the October–December quarter, alongside a 24% rise in deposits.

The bank has appointed KPMG to conduct an independent forensic audit, which is expected to conclude in four to five weeks.

"We appointed KPMG only yesterday (Sunday)... typically, to the best of my understanding, these processes could take about 4-5 weeks to conclude," he said.

Vaidyanathan said the discrepancy comprises about ₹490 crore identified through reconciliation and an additional ₹100 crore self-identified internally.

"We have put out this number as we could have assessed at this point of time -- we don't anticipate this to broadly move from here on," Vaidyanathan said.

Recoveries and an employee dishonesty insurance cover of ₹35 crore could mitigate the impact, he said, while noting that the bank would make provisions in line with policy but does not expect a major hit to profitability.

Deposits from the Haryana government account form about 0.5% of the bank’s total deposits, while overall government deposits account for 8–10%, he added.

IDFC First Bank shares were trading 15.71 per cent down at ₹70.39 apiece on the BSE at 13:10 pm.