IDFC First Bank is currently confronting a significant financial irregularity, which originated from a standard procedure involving the closure of a government account. A government unit in Haryana requested the closure of its account at the Chandigarh branch, but discrepancies emerged when reconciling the account balance. This inconsistency has now uncovered a fraud amounting to Rs 590 crore, prompting the Haryana government to remove the bank from its list of authorized financial institutions. According to Axis Securities, the issue is attributed to operational flaws linked to a cluster of government accounts at the Chandigarh location rather than any cyber intrusion or system failure.

Nature of the Fraud

The fraud first came to attention around February 18, when the initial discrepancy was valued at Rs 490 crore. Following an extensive review of related accounts, an additional Rs 100 crore was identified, stabilizing the total alleged fraud amount. Notably, IDFC First Bank asserts that existing controls were operational, including dual approvals, regular balance confirmations, monthly statements, and SMS notifications to the Haryana government. However, despite these measures, significant outflows were overlooked.

Bank’s Response to the Incident

In response to the crisis, IDFC First Bank has suspended employees involved at the Chandigarh branch and engaged KPMG to carry out a forensic audit, expected to last between four and five weeks. The bank has also lodged a police complaint regarding the incident and contacted associated banks to freeze suspicious account balances.

Plans for Enhanced Controls

The bank is now focused on strengthening its internal controls related to cheque processing and transactions of high value. Upcoming measures include the integration of artificial intelligence to ensure thorough verification of cheques and branch-initiated transactions prior to manual approval. Furthermore, the bank will implement mandatory customer confirmations for substantial debit transactions, where the processing will only occur after a response to automated alerts from clients.

Financial Implications of the Fraud

While the financial repercussions of the fraud are substantial, they are not expected to destabilize the bank. Deposits from Haryana constitute approximately half a percent of the bank’s total deposits, and since the fraud came to light, around Rs 200 crore has been withdrawn from these accounts. Overall, government deposits—including those from various state governments and public sector undertakings—still comprise around 8-10% of the bank’s deposit base. As of now, no other states have raised alarms concerning account irregularities. IDFC First Bank possesses an employee dishonesty insurance policy of Rs 35 crore, which may alleviate part of the financial burden.

Impact on Profitability and Stock Valuation

The potential impact on profitability is considerable. Should the bank choose to acknowledge the full Rs 590 crore loss in the financial results for the March quarter, it could result in a reduction of nearly 28% in earnings for FY26 and a decline of approximately 16 basis points in Tier I capital. Following the incident, Axis Securities has reduced its profit estimate for FY26 by 23%, though projections for FY27 and FY28 remain largely consistent, reflecting ongoing improvements in core operations.

Stock Market Response

Axis Securities has maintained a buy rating for the bank while lowering its target price from Rs 101 to Rs 87. This revised valuation assumes the fraud will not escalate, that additional issues do not emerge from other government accounts, and that the forensic audit by KPMG does not reveal further systemic vulnerabilities. The bank’s ability to continue attracting retail deposits at a faster rate than the market while enhancing internal measures will be vital for regaining stakeholder confidence.

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