A ₹590 crore fraud at IDFC First Bank!

In today’s episode on 25th Feb, we break down what went wrong at IDFC First Bank and what this fraud means for private banks in India. ⁠Book a Free call with Ditto⁠ https://ditto.sh/vx51ji

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  Hello folks, you're tuned into Finshots Daily. In today's episode, we break down what went wrong at IDFC First Bank and what this fraud means for private banks in India.

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  Before we begin, here's a quick word from Team Ditto. Life has a way of surprising us and not always in a good way. Sometimes, it's a sudden illness or an unexpected hospital visit that can shake up everything. In India, families still pay about 39% of medical expenses directly from their own pockets and just one hospital's stick can wipe out years of savings. The easiest way to protect yourself is by getting a good health insurance plan. It's way cheaper than footing one huge bill. And if you're unaware where to start, book a free call with Ditto. No spam, just honest, jargon-free guidance. Trusted by over 8 lakh people for their health and term insurance needs. The link is in the description. Now, back to the story. Transferring money today feels almost effortless.

• 0:56Speaker 00

  You pull out your phone, open your bank or UPI app, tap a few buttons and done, money sent. Checks feel like relics from another era and in many ways, they are because less than 3% of all transactions in India happen through checks. And yet, this almost forgotten tiny payment instrument managed to trigger a massive 590 crore rupees fraud at one branch of IDFC First Bank. But before we go further, here's something you should know. According to a statement by CM of Haryana, about 556 crore rupees of fraudulently transferred money has already been recovered, but there are still a few questions about how a fraud of such scale even happened. To begin with, a few days ago, the Haryana government noticed something odd in the bank accounts it and its departments maintained with IDFC First Bank's Chandigarh branch.

• 1:41Speaker 00

  Instructions to park surplus funds and higher interest fixed deposits weren't being followed. Instead, money was sitting idle in savings accounts, costing the government interest income. That raised eyebrows, so they asked for detailed bank statements and that's when things got serious. The balances reflected in the bank statement didn't match what the government believed should be there. Soon after, the government issued a circular, de-emanelling IDFC First Bank and AU Small Finance Bank for government business. Departments were simply told to stop transacting through Through these banks, close their accounts and move funds elsewhere. But when departments began closing accounts, they discovered that the balances still didn't tally. Preliminary findings suggested that bank employees had allegedly used forged checks to siphon off money to accounts outside the bank.

• 2:24Speaker 00

  The total, as you already know, was about 590 crore rupees, which brings us back to the uncomfortable question. How did this even slip through? See, you may barely use checks as a payment mode right now because digital payments have replaced most physical systems for retail transactions, but that's just retail. For large business and government transactions, checks still play a meaningful role. Because these accounts aren't owned by one individual, they belong to institutions. And moving money out of such accounts usually require multiple layers of authorization. Now, sure, all of this can be done digitally today. In fact, digital systems are often safer, especially when multiple approvals are needed. But many government departments, particularly those spread across rural areas or places where physical processes are more familiar, still rely heavily on checks.

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  So, think about what happens when you walk into a bank and say, hey, transfer money from my account to another. In effect, you're handing over a check signed by someone authorized to operate that account. Now, if that check carries a large amount, the banker doesn't just process it blindly. They confirm with other authorized signatories. And if the amount exceeds the banker's own approval limits, they escalate it to someone senior within the bank. This layered process is called the maker-checker system. One person or the maker initiates the transaction. And another independent person or the checker reviews and approves it. It's a dual-control four I's principle designed to prevent fraud, reduce errors and ensure compliance. But if you still look closely at what the C M of Haryana said, he was very specific.

• 3:49Speaker 00

  He mentioned that some middle and lower level employees at the bank's Chandigarh branch colluded to siphon off the money using forged checks and transferred it to unknown accounts. Now, think about that for a second. Siphoning off hundreds of crores isn't easy. Large transfers don't just sail through a bank without higher level approvals. It's hard to imagine that amounts of this scale could move without someone senior knowing. And then there's the other side of the story, the government departments themselves. These are not tiny private accounts. Government departments reconcile their books periodically. If money was being transferred without authority, how did no one notice? If reconciliations weren't happening properly, that points to serious lapses in accounting. Now, you could argue saying maybe they were small amounts siphoned off slowly over time,

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  but that seems unlikely too, as departments typically review accounts every quarter. Which suggests that transfers may have happened over a short span. All of this raises an uncomfortable possibility, that beyond the so-called middle and lower middle employees, others may have been involved. Yet, the ones facing action appear to be those who executed the transfers, and not necessarily those who authorized them. Now, a lot of this is still a question mark, but step back for a moment and ask, what does a fraud of this scale actually do to a private bank like IDFC First Bank? For starters, the Haryana government has ordered all its departments, boards and PSU's to shut their accounts with IDFC First and AU Small Finance Bank and move their funds elsewhere. Around 200 crore rupees has already left,

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  but since Haryana government deposits make up roughly 0.5% of IDFC First Bank's total deposits, that could mean as much as 1400 crore rupees walking out the door. And that isn't a paltry sum. Banks are already dealing with tight liquidity. If you've heard our recent story on SBI's recent results, you know that loan demand has been strong for banks, but deposit growth hasn't kept pace. That's where the CD ratio, or credit deposit ratio comes in. It measures how much of a bank's deposits are being used to fund loans, and it's a key indicator of liquidity and balance sheet health. A ratio of over 80% show aggressive lending and potential liquidity risks, and although IDFC First Bank's CD ratio has fallen from 134% pre-pandemic to 93% now, it's still a risky number.

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  Because low-cost deposits like savings and current accounts, also known as CASA, haven't grown meaningfully and have even declined by 5-6% post-pandemic, and banks have leaned more on fixed deposits. Those cost more, and higher funding costs squeeze profit margins. So, when cheap government deposits start moving out, it hurts more than it would have 5 years ago. Besides, government bodies and PSU's still account for 8-10% of deposits in many banks. So, if others decide to follow Haryana's lead and shift funds to larger or public sector banks, smaller private banks like IDFC First could find themselves scrambling to gather deposits just to keep up with the loan demand. So yes, this is sort of a strange situation that the bank has put itself and

• 6:39Speaker 00

  probably other banks in. And for all we know, now that the money has been recovered very quickly in just 24 hours, which again is good, yet very strange. This doesn't seem like a story that will continue doing the rounds in the news. Just like how every sensational story is talked about one day and forgotten the next, when something more interesting takes its place. So we may never really know for sure how or what exactly happened at IDFC First Bank. But if we do, then that's definitely a story for another day. Thank you for listening to today's episode. And if you want to share your feedback or suggestions, do drop us an email to [email protected]. Until next time.