IDFC Bank reports ₹590 cr. fraud in govt dep account

Fraud in government accounts in IDFC First Bank

Brief: Last week, IDFC First Bank (the bank) reported to the stock exchanges about a  fraud of ₹590 cr. occurred in its Chandigarh branch in certain specified accounts of some departments of the Haryana State Government. (As per disclosure norms stipulated in regulation 30 of the SEBI listing regulations). The fraud came to light, as there was discrepancy between the amount mentioned in the transfer/closure request letter of a particular department of the State and the actual balance available in the account with the branch. The bank informed the exchanges that the aggregate amount under reconciliation across the identified accounts at the said branch is approximately ₹590 crore.  The Bank further said that four suspected officials have been placed under suspension pending investigation and is in the process of appointing an independent external agency to conduct an independent forensic audit. It also filed a complaint with police authorities and to prevent fresh outflow from siphoned funds, requested beneficiaries' banks to line mark their accounts. The bank reported yesterday that in order to maintain highest principles and standards, even though the investigation is still on, it has paid out ₹583 cr. to meet in full the claims of the relevant departments of the Haryana Government. 

Is it unheared of? To be fair to the bank, fraudulent transactions in the bank accounts of state/central government were reported by other banks in the past and the list include public sector banks (PSBs) as well. However, the amount involved in this fraud is substantial in comparison to such transactions in the past. In some of the instances, getting the accounts/deposits through brokers or in liaison with the junior officials in the department, without completing the KYC in person with the authorised officials, were identified as some of the reasons for the root cause of the fraud. Even though technology has evolved since then, to easily identify the customer and his signature digitally, use of physical cheques for transfer of funds is even now a common occurrence in respect of government transactions. One safeguard adopted by the government departments and the banks, earlier, was that before issue of a cheque for transfer of funds beyond a limit, a debit note/bill prepared and approved by authorised officials of the government department, is attached to the cheque to be presented to the bank. It is high time  that the procedures in the government are defined in such a way that manual intervention/physical preparations are kept to the minimum.

Implications: I listened to the audio recording of the conference call arranged by the bank with the analysts and investors of the bank, in which senior officials including the MD & CEO participated and answered all the questions raised. It transpired that the share of total deposits of the departments of the Haryana Government to the total deposits of the bank is roughly around 0.5% (₹1400 cr. app.). The bank also shared that the total deposits held by all the state governments and central government as on date may be between 8-10% of the total deposits of the bank. (The total deposits of the bank as on 31st Dec' 25 was ₹2.82 lac cr.). 

Some of the relevant questions raised by the investors included how - details of transactions beyond a limit and the periodicity in which the statement of accounts/balance confirmation - were shared with the  customers. MD & CEO replied to most of the queries and to be fair to him, he sounded positive and transparent in his replies. But the repeated emphasis 

(i) that the fraudulent transactions are solitary in nature 

(ii) that in its ten years of existence, the bank was never found wanting 

(iii) on the business parameters achieved since merger of IDFC Bank with Capital First 

made one to feel, whether the explanation offered should have confined itself to the risk parameters built, especially operational risk, instead of the business parameters achieved.

The strong point of the bank are that its net worth was ₹47048 cr., CAR was  16.22% with CET 1 at 14.23% and the net NPA ratio was 0.53 as on 31st Dec' 25. With the capital available, the bank is definitely in a strong position to meet unforeseen contingencies for a significant amount. However, it needs to be added that the total business levels at ₹5.62 lac cr. as on 31st Dec' 25 (Deposits ₹2.83 lac cr. + advances ₹2.79 lac cr.) had grown nearly four times its levels as on 31st Dec' 18. (immediate quarter post merger of IDFC Bank and Capital First). The aggressive expansion of  branch network along with pushing the deposit and loan products with the most competitive pricing made this possible. When a bank expands in such a pace, one expects the operational risk parameters, with particular reference to audit trails, are update, fine tuned and robust, especially if the following factors are taken into account:

a. The physical branch network expanded more than five times from 206 branches at merger to 1066 branches as on date. Any physical branch expansion involves increase of manual posting/ checking of transactions and branches which are situated far away from head office calls for extra attention.

b. 52% of total deposits reported under CASA with 33% achieved YoY, unlike fixed deposits,  are daily operated accounts.

c. It is possible that most of the CASA accretion was ably assisted by the bank's  offer of 6.5% for savings account beyond a limit, in addition to attractive zero-fee charges on several parameters. In its presentation, the bank mentioned that its cost of funds, at 6.1%,is still 60 bps higher than the average cost of funds of scheduled commercial banks (SCBs)

d. Channel sourcing expenses and volume linked expenses account for a significant portion of its operating expenses. These are mainly commission expenses paid to outsourced agencies to bring in business. 

e. The bank is able to increase its deposits by 24% YoY and advances by 21% YoY, much higher than the average growth in deposits and advances reported by other banks in the current FY.

f. To meet the increased cost in sourcing deposits/others, the bank relies on high yielding retail advances and this might be one of the reasons for it to still maintain an impressive NIM of 5.7%, even when the cost of funds is higher (as indicated above).

g. The CD ratio is still above 90% 

I sincerely hope that the bank indeed has robust operational risk matrix to take care of the above and explain it in detail in its future disclosures.

Suggestions: Before concluding, I have a few suggestions for favour of consideration by the SCBs in order to improve the supervisory oversight in operational risk parameters:

I. In respect of state and central government accounts, which are still transacting their transactions through physical cheques, manual orders, etc. centralised liability processing centres (CLPC) may be entrusted with the job of 'checker' for transactions beyond a limit, while the branches may continue to be the 'maker' for such transactions. If that is not possible straight away, the transactions may be brought under the list of high value/suspicious transactions to be scrutinised at the CLPC at the end of the day.

II. Other than cheques presented in clearing, physical cheques tendered at the branches are not scanned and kept in the system. Even the scanned image of the cheques presented in clearing may remain only for a few days in the system, in view of space constraints. The physical cheques kept in the branch only may have to be relied upon, in case of disputes. It will be worth considering to keep the 'image' of the physical cheques tendered for cash/transfer payment also in the system, if not in place already.

III. KYC compliance requirements in respect of accounts, where the authorised signatories get their powers to sign cheques in view of the positions held in the organization , may be revisited for making it more robust.

IV. Internal and concurrent audit force occupy a significant portion of the total staff strength in PSBs. The advantages are obvious. They form the first force of defence in risk matters. Private banks may take a cue and add a good number in its internal audit team, while enhancing their off-site surveillance through the system.

Introduction of risk based premium for insuring the deposits under DICGC from 1st April 2026, if disclosed, might give the depositors an additional tool to understand the risk profile of a bank, before depositing.

Regards

V.Viswanathan

CGM Retd. e-SBT

25th February 2026