IDFC First Bank shares tumble after ₹590-cr fraud at Chandigarh branch

Shares of IDFC First Bank tumbled as much as 20% on Monday after the lender disclosed over the weekend that a ₹590-crore fraud had occurred at its Chandigarh branch involving Haryana government-linked accounts, prompting the Reserve Bank of India to step in with assurances that there was no systemic risk.

The stock fell sharply in early trade on the National Stock Exchange, slipping nearly 20% intraday to around ₹66.80 per share before trimming some losses.

According to the bank, the fraud pertains to a particular branch in Chandigarh and is confined to a limited set of Haryana government-linked accounts and certain branch employees, ‘most possibly in connivance with external parties’, fraudulently transferred funds to beneficiaries holding accounts outside the bank.

“It is clearly a case of employee fraud,” managing director and chief executive officer V. Vaidyanathan described it during a conference call held on Monday morning, adding that ‘our internal fingerprints and details are quite clear that external parties are also involved here’.

The total discrepancy stands at ₹590 crore, with ₹490 crore identified through reconciliation and an additional ₹100 crore estimated by the bank.

“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 bank’s management said, though it cautioned that minor changes are possible as the forensic audit progresses.

The bank has appointed KPMG to conduct a forensic audit, a process it expects could take four to five weeks. All suspected employees have been suspended, police complaints have been filed, and other law enforcement agencies have been engaged.

The lender has also initiated recovery and lien-marking actions across the banking system.

“The money has gone to many other banks actually in the system…and they’re all highly cooperative,” the management said.

Outflow beneficiaries

Following the disclosure, the Haryana government de-empaneled the bank and AU Small Finance Bank from parking fresh deposits. AU Small Finance Bank has also initiated an internal review after this move by the Haryana government, alongside IDFC First Bank.

Potential beneficiaries from this deposit outflows at IDFC First Bank and AU Small Finance Bank could be Punjab National Bank and other state-owned banks, including State Bank of India, Canara Bank, Union Bank of India and private sector lenders such as HDFC Bank, ICICI Bank and Axis Bank, Rikin Shah, equity research analyst IIFL Capital Services said.

Haryana government deposits account for roughly 0.5% of the bank’s total deposits, while all state and Union government deposits together form 8-10%, Vaidyanathan said, adding that about ₹200 crore has already flowed out.

However, the management maintained that the impact is manageable given the small share.

For the quarter ended December, the bank’s customer deposits touched ₹2.82 trillion, up 24% on year. The bank said that its overall deposits are growing at about 20-25%.

“The fraud amounted to ₹5.9 billion (3% of deposits in Haryana). Assuming 10% of deposits in Haryana are from the government accounts, it would lead to a potential outflow of ₹20 billion (0.7% of total deposits),” Shah said in a post-impact note.

According to Macquarie analysts, the fraud appears to be an isolated incident but warned of broader current account and savings account implications.

“…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,” the brokerage note said on Monday, adding that this has come as post-covid, Casa ratios across the system have already declined 500-600 basis points from peak levels.

Plugging the gaps

Despite the hit, the lender exuded confidence on profitability. “We were expecting a very solid quarter…Despite this hit, if we were to take one, we still expect to be profitable,” the management said.

Operating profit of the bank has crossed 2% from 0.5% earlier, and net interest margin is expected at about 5.8% in the March quarter, with credit costs trending lower.

Separately, Reserve Bank of India governor Sanjay Malhotra, speaking at a press conference with finance minister Nirmala Sitharaman in Delhi said that the Reserve Bank of India (RBI) is watching the development around the ₹590 crore fraud at the bank and said that there is no systemic issue.

To plug gaps, the bank plans to introduce mandatory digital confirmations for high-value branch-based transactions and deploy artificial intelligence-led checks for physical instruments.

“This is the most traditional kind of fraud…We will really scan every nook and corner of the bank for any such process gaps,” Vaidyanathan said.

For now, investors appear cautious, with the stock under pressure as the market awaits clarity from the forensic audit and potential recovery of funds.