IDFC First Bank Case: Is government money safe in private banks, IDFC First Bank case increased tension?

IDFC First Bank is facing difficulties right now. Last weekend, the bank said that a fraud of ₹590 crore has been detected in a particular branch in Chandigarh. This fraud was found in the accounts related to Haryana government. After coming to know about this, the Haryana government immediately took action and removed the bank from its panel. After this, about ₹200 crore was withdrawn.

AU Small Finance Bank was also similarly affected, and the Haryana government had started the process of closing its account with it. However, the Reserve Bank of India (RBI) has clarified that this incident does not pose any major threat to the banking system and the system is completely safe and stable. However, another disturbing thing behind these incidents is the poor relationship between government departments and private banks.

Debate on the role of private banks in government accounts

These incidents also show the difficulties faced by private banks in handling government work. IDFC First Bank is not the first bank to fall victim to fraud. Earlier, big private banks like HDFC Bank, ICICI Bank and Axis Bank have also faced similar problems.

In the case of IDFC First Bank, the Haryana Government deposits were only 0.5% of the bank’s total deposits, which means the amount was not large. However, experts say that it may take several months to repair the damage caused to the bank’s reputation due to this incident.

A senior banker at Standard Chartered India said, “What happened in the IDFC case has affected the credibility of both the government and the bank. It raises questions on the processes and systems of the bank. Such incidents happen when an institution lacks robust systems, protocols and audits.”

Open path in 2021

Earlier, private banks were not allowed to participate in government work. Most of the government transactions and departmental work were done only through public sector banks (PSU banks). However, in February 2021, the central government removed this ban. The aim of the government was to provide equal opportunities to all banks in government transactions. After this decision, private sector banks could also participate in those tasks which were earlier limited only to public sector banks, such as handling government accounts and transactions.

This was a big opportunity for private banks, because this could improve their CASA (Current Account and Savings Account) ratio. This also helped them reach more customers and provide better service through their technology. The higher the CASA ratio, the easier it is for the bank to get funds at a lower cost. Government accounts helped private banks access stable, low-cost deposits.

Trust remains in public sector banks

When a lot of money is at stake for government departments, even a small incident can force a rethink on the policy. Although the cash management of private banks has definitely improved due to their inclusion in government work, but trust still remains a big issue. Public sector banks have some advantage in this matter.

An old banker said, “Even today, in many places people prefer private companies. But when it comes to financial services like banking or insurance, government institutions like SBI or LIC are trusted more. People believe that even if private companies do not honor claims, SBI or LIC will definitely fulfill their promises.”