← Throughline · holding view Deep analysis ↗ Q3 FY26
IDFCFIRSTB IDFC First Bank Ltd · Private bank Q3 FY26 · concall
Pattern: p l vs recovery

Q4FY26 absorbed the Rs. 646 crore fraud upfront.

3 deflections · 8 weak · 12 clean — pushback across 11 of 23 Q&A turns

Focused evidence 11 of 23

Kunal Shah · Citigroupweak

Firstly, in terms of the impact as you indicated the aggregate amount involved in the reconciliation is almost like INR590 odd crores. Would this entire amount be repayable to the Haryana government and the liability lies on us? So this will be like something like the entire financial impact that will have to be taken through the P&L or is there any other way is there some money which is still available in those particular customer accounts at this point in time?

So, this you know basically we're doing a, layer by level one, level two, level three , we're figuring out where the money has gone and, to the extent that there are moneys lying in account have not left the system, to that extent of course we will we will be able to block the money and try to recover those dues.

Kunal Shah · Citigroupweak

Sure. So, you don't see any potential contingent effect of other state government's decision in terms of how they allocate the government business to this de -empanelled banks? Would there be a risk on that front?

We'll have to take it as it comes, but you know, we are a bank with a strong capital adequacy, with a good rating. As you know we are rated AAA by CRISIL on fixed deposits and AA+ in the long-term rating of the bank, which by the way has got upgraded twice in the last five years from AA- to AA and from AA to AA+. And you can clearly see the direction of travel of the bank's rating. Our net worth is over INR46,000 crores. Our customer business, which is both deposits and loans, is now touched INR5.6 lakh crores and you can see the growth over the last five years. So, our intention is not to really to litigate this or anything like that, where if we have made a mistake, we will own it up straightforward and we will do whatever requires to be done.

Piran Engineer · CLSAdeflection

Yes, hi, good morning. Just my first question is how long did this fraud go on before it was uncovered?

So some of these questions will be difficult to answer at this stage because there are implications as we speak. This can become a legal matter and anything we say at this point of time, we'll have to be very careful. So let me just say that it has in a significant way as we put out in the stock exchange, when we first got Haryana government's request to transfer funds to another bank. At that stage, the bank saw that the money was not reconciling as much as the government department thought was there in the account vis -a-vis what was actually in the account , which probably was a month ago but it accelerated during the last three days from February 18th onwards.

Piran Engineer · CLSAweak

No, see my question came from the point of view if it's been happening for a long time, you know, it's also then the fault of the Haryana government and then they should pay up for it. Why should the bank pay up for it is how I'm thinking ? If their own officials have done that, then why are we liable?

Yes, see, that that's the reason I said that, we are not putting out any specific number right now as to what we will provide for , not provide for, etcetera, because there's time between now to the next results. So we'll think the whole thing over because if counterparties are like the ones you're mentioning, if that component is identified or covered, I'm sure they will also look into the matter. It could be the third parties where the money has been transferred out . We will really go hell after leather after those people as well. So we will take this as it comes. But we have put out the, in our best estimate the outer limit of what could happen to in a sense .

Piran Engineer · CLSAdeflection

Got it. And also like is there a chance that employees one level up are also involved because if the maker checker process is there, ideally the checker should be someone who is not in touch or knows the maker?

Well, we'll come to know during the forensic audit and everybody will be investigated and the trails and everything will be checked, and we will identify this and get to the bottom of this.

Vincent · Principal AMweak

Okay. And I think one last point is that based on what we know so far, how is it that the client received statements monthly and did not realize this happened, Yes?

No, this is indeed a good question. The client in this case, these are system triggered, this is important to note. These are system triggered SMS, email alerts of every transaction had been sent and so on. So well, these are your question is something that will be examined as part of the process of evaluation and therefore hopefully, the respective responsibilities will be assessed and we will take it as it comes.

Param Subramanian · Investecweak

Okay, fair enough. Yes, I got very clear. So, again on liquidity, right? So I mean our LCR is at like 115%, it's a little lower than where the other large private banks are. So as some abundant caution say from a near -term perspective, will we have some say higher liquidity buffers we'll be maintaini ng so, you know, consequent near -term impact on margins? I'm just trying to understand sir the implications from a near-to-medium term business trajectory?

Bank always makes, you know our bank. We always keep high capital adequacy more than requirement. We always do retailization more than requirement. We always keep more liquidity than more than requirement. We are like super, super conservative in the way we run the bank. You can see that the credit deposit ratio of the bank for 7 years in a row on an average for the last 7 years is 75%. Okay, 75%. So we run the bank through core high quality retail deposit franchise from individual customers. So not to worry, these are our principles of running the bank, never take chances and that's how we'll run it.

Nitin Aggarwal · Motilal Oswalweak

Yes. Hi for the opportunity. Just sir one small question like this money that has gone out INR590 crores, like is it all to the private banks or some PSU banks also there? And only two banks have been de-empanelled by the state government. So why is that so and any color , if you can share as to the mix of the outflow and this some rationale on all this de-empanelment?

The money has gone to many other banks actually in the system. And even those banks are cooperating in the process. So we've reached out to many of them and they're all highly cooperative. That we can understand there, from their point of view, from the counterparties' point of view, that that incident has occurred. I think it will be a natural reaction for them to put to take the action they did. I think that it is our responsibility to do better and to and to give the necessary assurances and come back in the game.

Deepak Gupta · JM Mutual Funddeflection

Hi morning sir. I just wanted to understand the timeline of the incident, given the fact that the branch would have been subjected to multiple concurrent and internal audits, does it imply that this would have been a recent transaction, which is why it wasn't discovered?

I mentioned that, no, earlier that there are certain things which are under the under the scope of the audit, let the information come out as it comes out. But the trigger was the fact that certain departments, asked for balance confirmations. And then wh at they assumed or they thought, basically the books of accounts there was a difference and that's how we surfaced this.

Deepak Gupta · JM Mutual Fundweak

Understand that. And sir, given the fact that, that there has been wrongdoing from the government side as well probably and the investigation is going on, shouldn't we fight tooth and nail to get the money back or to ensure that we don't have too much of financial loss?

See, the thing is that first of all , it is the forensic audit that will establish a lot more of these of the facts. And from the facts will come responsibilities. And it is you could be very well be right that there could be errors from the other party as well, there could be error from the some colluding party who are the beneficiaries. If it's our responsibility we will foot the bill. And to the extent our responsibility is crystallized, definitely we'll foot the bill. We will not fight tooth and nail for things that we don't deserve to keep in our books or our P&L.

Jayant · Axis Capitalweak

Thank you for the opportunity. One question I wanted to ask , what would be the size of government state government deposits in our overall deposits and do you see any impact? Second question was that only sir, that I'm sorry if it's already answered, but is do you see any impact from other state governments in North?

That we have deep strong relationship with everybody, our systems are deeply integrated with these with the systems of these governments, we pay we collect taxes for them, we do there are multiple sets of services we collect state taxes, central taxes, GST, central so there are just so much more we do with them. It's like deeply integrated relationship. We expect the relationship to continue to behave well with everybody else. And like I said, we are a, well-rated bank. I'd like to say we are AAA CRISIL on fixed deposits and AA+ on CRISIL on long-term rating.

▸ Other Q&A (12)
Kunal Shah · Citigroup

And if you can just quantify in terms of how much of the money would have been left, how much is the total Haryana government deposits and what would be the total government deposits for IDFC Bank?

Yes, so Kunal I'll come in. So, the total Haryana government deposits are roughly 0.5% of our total deposits, so it's not that meaningful in that sense. Since the notification which came a couple of days back, we have seen an outflow of about INR200 odd crores here. But we feel since the overall number itself is small, it should be quite manageable.

Kunal Shah · Citigroup

Yes. And anyways wherein this would have been avoided and now looking at the internal controls what we would put in place in terms of authorization limits with respect to a particular ticket, would that have really helped or maybe there wouldn't have been no way because there would have been the connivance with the external parties as well and maybe it shouldn't have been avoided? So what internal controls, processes, how stringent we would get with particularly with respect to the government accounts and government business with this incident?

The thing is that , at this point of time, even as we speak, there are excellent controls, which obviously, has failed in the case because of collusion. But let me just share with you the controls itself in any case. There is a proper governance framework, there are defined SOPs, there is authorization framework, there is a maker, checker, authorizer systems in banks as in case certainly in the case of ours. We are planning to put an explicit system based on confirmation of high value transactions for branch -based transactions exceeding a predefined threshold, we will take an explicit confirmation from the customer and we'll make it mandatory. Now with the arrival of AI, we are also going to additionally bring, currently, say before the arrival of AI until the banking till date, the authorizer, the branch manager physically sees the cheque and confirms signatures are matching and clearing it. But now we will put a system whereby through AI, AI will do a initial checking and then it will be double confirmed by the human.

Piran Engineer · CLSA

Got it, got it. And just lastly, overall government deposits with the bank would be how much? Like Haryana is 0.5%, but all put together?

I think it would be in line with broadly the industry standards, would be about for us also it's about 8% to 10%, somewhere in that zone.

Vincent · Principal AM

Yes, thank you for making this call. I'd like to ask since February 18th this year, what other communications from other government related or linked clients or accounts have we received related to this matter?

Nothing, apart from what has come from this government, state government department, nothing else. Like I said, we enjoy good relationship with the ecosystem . And then we are deeply integrated, it's a very important point for you to take note of, is deeply like system -to-system, host-to-host integrations are on. So it's a running machinery . It's not only that somebody's left deposits with us.

Vincent · Principal AM

And I think since we're trying to size the impact, do we by any chance have insurance on this?

Yes, Sudhanshu mentioned that a moment earlier, we have some employee dishonesty insurance of about INR30-odd crores in this case.

Vincent · Principal AM

Well sir, I just need to get this right, which is accounting for the fraudulent transactions after that the statements are true and accurate ? H ad the transactions happened the balance are accurate?

No, no, obviously, because to the extent, let us say that a bank account has a INR100 and suppose INR20 has been taken out, has a cheque has been passed out of INR20, the balance INR80 is the balance on the books of the account. And that is what the statement of account will go for. Yes, so that is what it will go for. So there is no error, there is no absolutely no error in the statement of account as such. The statement of account is true and accurate.

Param Subramanian · Investec

Yes, hi, good morning. My first question is on this forensic audit. So what is the scope of this audit? Is it specific to the branch or is it wider and when can we expect the outcome of this?

Yes, so I'm saying as I said this incident seems to be just particular to this branch and largely because of connivance of employees and maybe some parties outside. So we're yet to finalize on the scope and we've appointed KPMG only yesterday, so we'll get in to some of those nitty-gritties during the course. And typically depends on the investigation of course, typically to my best of the understanding these processes could take about four to five weeks to conclude.

Param Subramanian · Investec

Okay, okay. Then on deposits overall, I mean I know it's very early days, but do you think this can have any implication I'm not talking about state government, but overall on say higher value deposit balances, because we have only just started undertaking this journey of reducing our savings account rates, right? So is that something that you think will see some delays or because we are also following a strong growth trajectory. Any colour on that relatively? And secondly, we are talking about say, a tight control on cost going ahead. Will this have any implications on that because I heard you mention Vaidya that we are undertaking a review of our processes etcetera. So any impact on say both of these things?

So first of all you see the bank's largely let me say , while this is a collusion of employee case, the bank systems are already in place. So obviously, let me just say that systems of the bank are running really very, very well. This is a case of collusion. So this is a case of collusion of our employees with some counterparties outside. And this is a key risk to address is the collusion risk. The systems as such are running really well and fine. So we don't expect that because of this we have to put so many new controls that going to impact the cost of the bank or anything like that. Your second question is the bank reduced interest rates so sharply recently. Well, the fact is that, yes we have dropped interest rates, but the deposits are continue to come well from even after we dropped the rates and it's quite comfortable.

Param Subramanian · Investec

One last question Vaidya, if I may. So I mean what is the gap that you think I mean you will be undertaking a review, but what is that gap versus some of the large private banks that you think was there if any, or do you think this could have played out in any bank in your view be cause you did call out that you have been strong in our risk management, but this has happened at our bank, right? So what is that gap and what are we doing incrementally to bridge that?

Yes, clearly , clearly employee collusion risk, if a maker checker authorizer everybody in a branch compromises with a counterparty on the outside and clears a fraudulent cheque or clears a fraudulent transaction, maybe in this case even with multiple parties. So this is the kind of a stuff that can happen anywhere, that too in this a traditional the oldest kind of fraud of a cheque and that kind of stuff. But really when we will also introspect on this, we should also think about our staff transfer policy, how maybe their own behavior, maybe we should be able to figure out more transaction pattern of how employees' accounts and conduct are, we need to think a little deeper about how we could have stopped dealt with the collusion.

Prakhar Sharma · Jefferies

Hi, good morning and thank you for doing this call in a timely fashion and sharing the color. I just wanted to ask if it would be possible see the biggest question that all of us are trying to wonder is this one branch, one government issue or is there any chance that maybe a month or two later something else comes up? Is it possible to cover in the scope of either the audit or separate exercise a reconciliation of balances across governments and maybe issue a consolidated press release that this exercise has been done and no gaps have been observed or if any gap has bee n observed.

Yes, this is a good point, this is a good point. We will evaluate this actually. We'll think this over a little. But I think it's a good point. Because see the thing is that the more we expand the more focus will be lost, we want to be very , very clear about the focus of this we have to get to the bottom of this. And with regard to the due diligence, whether internally or externally, we will definitely do a proper due diligence on the rest of the system as well. Definitely do that and thanks Prakhar, that's a very good input.

Subir Sen · Aditya Birla Sun Life Insurance

Thanks for the opportunity. Just wanted a small clarification that 490 plus 100 which you mentioned, that 100 also pertains to Haryana government? And this is only one account and one che que or there are multiple che ques and multiple accounts?

Yes, yes. I think these are multiple.

Siva Natarajan · Principal Asset Management

Yes, hi, thanks. Just following up on an explanation you gave earlier, is the process for authenticating and clearing a physical cheque at IDFC the same as other large private banks?

Yes, it's very much the same. In fact we are absolutely on par with any good bank. This is a collusion that has happened, like we discussed before. And it's a collusion risk, it can happen anywhere. But of course we will now reflect on it and see what more we can put in terms of the controls. But to answer your question, yes, of course, not only the process es are the same, we do validation, then there's eye-to-eye checking of the cheque versus the system, so the process are same basically you check the signature on the instrument versus the system of the system, you clear it and then there is a double triple check of a maker, authorizer, verifier etcetera.

▸ Prepared remarks (5 blocks)
Yes, before I invite Mr. Vaidyanathan, maybe I'll just give a brief synopsis of the matter. We did made a press release on February 21, but just for context I will just lay out the issue once again. This matter pertains to a particular branch in Chandigarh and is confined to a limited set of Haryana government linked accounts. The main issue which we have observed here is that certain employees of this branch, most possibly in connivance with external parties, have fraudulently transferred these amounts to beneficiaries who had accounts outside of our bank. These accounts are also expected to be suspicious. These could be done in connivance with third parties, the details of which will emerge post the forensic audit which we have initiated with KPMG and further investigations by law enforcement agencies and so on. We can assure that the bank has acted very swiftly and decisively to handle this matter. All employees whom we currently suspect have been suspended. There is no senior management involvement in the entire incident as far as we understand currently. We have conducted proper fraud management committee meetings, board and audit committee meetings. As I said, KPMG has been appointed to do the forensic audi t. We have kept regulators informed, auditors informed of this matter. We in terms of actions, we have already filed police complaints and we are engaging with other law enforcement agencies. We have also initiated recovery and lien marking actions across the banking system. So these are certain actions which we have already taken. We have existing controls in place, of course in light of the incident, we will try to enhance certain more contro ls as we sort of move along.
But I can assure you that this issue is confined to only this branch. There is no impact as such on any other customer or any other branch which has come to our notice. In terms of financial impact, the discrepancy currently found is about INR<strong>490 crore</strong>s. We have additionally where we have received I would say certain reconciliation requirements, so then through the reconciliation we observe that there is a discrepancy of INR490 crores. We have additionally estimated INR100 crores, that's how it comes to a INR590 crores of impact which we have put out in the press release. We have put out this number as we could best assess at this point of time, but we feel that the number is broadly appropriate to th e situation, current situation. We don't anticipate this to broadly move from here on to a great extent. It could be a small as we sort of go through the process, maybe these numbers could slightly change. Again want to assure that the bank is well capitalized. As you would recollect in the previous earnings call also we have said that the profitability of the bank is on a positive trajectory because we expect credit cost to keep coming down and we also expect improvement in net interest margin during the fourth quarter and hence whatever is the outcome of this exercise, we should be in a comfortable position to subsume that. And we are making all efforts to trace the flow of funds and seek appropriate restoration of funds.
Yes, good morning everybody. Thank you very much for joining this call. A few investors called us yesterday and told us that, the information that we provided in the note to the exchanges is quite detailed, but still the impact, the financial impact is not well understood, whether this entire amount will be hit to the P&L, whether recoveries will come, etcetera. And that's where then we thought to ourselves that we should take this investor call right now and explain to you what the implication is. So this is broadly the subject of it. And before we come to the financial implication, I must just say that this is a specific isolated incident that has happened in one branch with one client group, which is the group that has been named out there by us. And you know, this is basically a case where debit instructions have come supposedly from the client, which our people, which clearly to us indicates a fraudulent activity, have passed the entries and have transferred the money to certain parties outside the b ank from the client's account. Now they've also used cheques, when in looked in hindsight looks forged, but someone has cleared it. So this looks to us on the basis of the work we've done, clearly a case of an employee fraud and it also, our internal fingerprints and our details are quite clear, that external parties are also involved here. So this is a serious matter for us. We have run this bank now for as you know, for 10 years and we have never seen a instance like of this order of magnitude, certainly not. Bank has really excellent controls across the system. As you know we are a very technology ahead bank or technology first bank and on all fronts like mule and AML etcetera, bank is doing you know very well in terms of overall numbers and controls and so on. But this is not a digital transaction. This is a phy sical transaction where people have come, you know, the cheques have been forged.
This is, let me say, the oldest kind of fraud probably known to banking. So how this has happened is obviously happened with the connivance of employees. There is maker, checker, authorizer, the whole system exists, but obviously with some bunch of people have come together to make it happen. So we will get to the bottom of this, we will spare no one and, we have quickly moved in. We have, appointed a forensic auditor for this, KPMG, and we will expect them to move you know in great diligence and move very fast and, we will take the full support of the law enforcement of the country and really I can tell you we will spare just no one and we will take it as it comes. Now as far as the bank is concerned, I'd like to specifically share with you that the bank is now fundamentally in a strong position. So just to share with you that the operating profit of the bank has now crossed 2%, which was earlier 0.5%. So basically on the core of the bank, it is now that bank is on a very strong position and therefore and the graph is rising. We have already guided to you earlier that on the basis of the trajectory and the incremental unit economics, we expect this to further go upwards of about 3.5% in due course as the bank fully evolves based on the rates at which we borrow and the rate we lend and the margin we enjoy, which is upwards of 5.8% or 5.7% last quarter. But this quarter we expect to be 5.8%. So on the basis of that strong strength, we feel that this is an incident that will pass through the P&L as and when it comes and we will take it out. But I can tell you this incident will not pass through our memory because this is a very significant event for us and we will really scan every nook and corner of the bank for any such process gaps if any or any employee collusion fraud etcetera.
In terms of financial impact, the discrepancy currently found is about INR<strong>490 crore</strong>s. We have additionally where we have received I would say certain reconciliation requirements, so then through the reconciliation we observe that there is a discrepancy of INR490 crores. We have additionally estimated INR100 crores, that's how it comes to a INR590 crores of impact which we have put out in the press release.
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