IDFC First Bank (IDFC) is facing a suspected fraud case of Rs 590 crore. What started as a request by a department of the Haryana government to close the account and transfer the balance has now led to a massive internal investigation, regulatory disclosures and now a sharp reaction in the market.
In fact, a government department of Haryana requested the bank to close its account and transfer the remaining amount elsewhere. During the process the bank found that there was a difference between the amount reported by the department and the balance recorded in the books of the bank. This one discrepancy sparked an extensive internal investigation.
During the investigation, which began on February 18, other departments associated with the Haryana government also lodged similar complaints. Preliminary assessment found that the irregularities were limited to a specific group of accounts linked to the Haryana government operated in the Chandigarh branch of the bank. In a communication to the stock exchange, the bank said the issue does not appear to have spread to other customers of the branch.
According to the bank, an amount of approximately Rs 590 crore is being reconciled. The ultimate financial impact will depend on how much is recovered, the extent of insurance coverage, the verification of claims and what form the legal process takes.
Investor reaction following the regulatory disclosures was sharp. The bank’s shares fell by about 20 percent on the Bombay Stock Exchange. The market decline indicated that investors had serious concerns about internal controls, security of government accounts and corporate governance. The bank has suspended four employees involved in the irregularities and reported the matter to the Reserve Bank of India, law enforcement agencies and other statutory authorities.
The Special Committee on Fraud Monitoring and Follow-up met on February 20, followed by a review by the Audit Committee and the full Board of Directors. The bank has appointed KPMG for an independent forensic audit. Also, recall and lien mark requests have been sent to other banks where suspicious beneficiary accounts have been identified.
Senior management indicated in a call with analysts that the matter may be related to unauthorized activities by some employees allegedly in collusion with outside parties. The bank said its capital position is strong and the financial impact will depend on recoveries and insurance claims.
The Haryana government has temporarily suspended all transactions with the bank during the investigation. Although the bank says the matter is under control, alleged tampering and procedural lapses in public sector accounts have increased surveillance. As the investigation progresses, main questions are being raised regarding recovery, accountability and strength of internal control system. What started as a simple account closure request has now turned into a massive governance test for the bank.
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