IDFC First Bank fraud case: RBI ‘watching development’; what the central bank said

The Reserve Bank of India (RBI) on Monday reacted to the IDFC First Bank fraud case that came to light over the weekend. “We are watching the development, there is no systemic issue," RBI governor Sanjay Malhotra said.The Rs 590 crore fraud linked to Haryana government accounts stemmed from collusion between certain IDFC First Bank employees and outside entities, Managing Director and Chief Executive Officer V. Vaidyanathan said on Monday.Speaking during a special call with investors and analysts before the equity market opened, Vaidyanathan said the bank would make provisions in accordance with its policy of recognising stress at an early stage. He added that the financial impact is not expected to significantly dent profitability, noting that improved net interest margins and lower credit costs would provide support.“So, on a standalone basis, we were expecting a very solid Q4 in terms of profitability,” Vaidyanathan said.Following the disclosure of the fraud involving Haryana government accounts, the state government removed IDFC First Bank and AU Small Finance Bank from its empanelled list for handling government business. AU Small Finance Bank has denied any involvement in wrongdoing.Vaidyanathan said the independent forensic review being conducted by advisory firm KPMG is likely to be completed within four to five weeks. “We appointed KPMG only yesterday (Sunday)... typically, to the best of my understanding, these processes could take about 4-5 weeks to conclude,” he said.The discrepancy has been estimated at about Rs 590 crore, which includes Rs 490 crore identified through reconciliation and an additional Rs 100 crore detected internally. Vaidyanathan indicated that the figure is unlikely to rise further. “We have put out this number as we could have assessed at this point of time -- we don't anticipate this to broadly move from here on,” he said.He added that recoveries, along with an “employee dishonesty insurance” cover of Rs 35 crore, could help mitigate the financial impact.Describing the matter as a case of collusion involving staff and external parties through forged physical cheque transactions, Vaidyanathan said the irregularities were restricted to a single branch and one group of clients. He maintained that there was no flaw in the bank’s reporting systems.The bank has filed police complaints, informed regulators and statutory auditors, and begun recovery measures including lien-marking actions across the banking network, he said.According to Vaidyanathan, deposits linked to the Haryana government account for around 0.5 percent of the bank’s total deposits. Overall government deposits, including those from central and state entities, make up between 8 and 10 percent of the deposit base.