MUMBAI / CHANDIGARH / NEW DELHI, Feb 23 — Shares of IDFC First Bank plunged sharply on Monday after the private lender disclosed a suspected ₹590 crore fraud at its Chandigarh branch, triggering a steep loss in market value and mounting governance concerns among investors.
The revelation of the unauthorized transactions involving accounts linked to the Haryana state government sent shockwaves through financial markets, erasing roughly ₹14,438 crore in market capitalization as investors rushed to offload the stock. The steep sell-off marked one of the worst single-day declines in the bank’s trading history.
The lender identified discrepancies amounting to 5.9 billion rupees ($65 million) during a routine reconciliation prompted by a request from government entities to close their accounts, according to regulatory filings.
Fraud Discovery and Allegations
IDFC First Bank said the discrepancies stemmed from transactions at its Chandigarh branch that did not match official balances maintained by government linked accounts. Four bank officials have been suspended as part of the ongoing internal investigation.
The fraud came to light when departments within the Haryana government approached the bank seeking account closures and fund transfers. During the reconciliation process, auditors identified a mismatch of ₹590 crore, prompting further scrutiny and reporting to authorities.
The bank has reported the matter to law enforcement and is coordinating with external agencies to conduct a detailed forensic audit, with plans to pursue legal action and recovery of misappropriated funds.
Market Reaction: Shares Plunge
Investors reacted sharply to the disclosure, sending the stock into a steep decline.
IDFC First Bank’s equity hit its lower circuit limit in early trading, briefly sliding as much as 20% before settling near the day’s low. By market close, the stock had ended around 16% lower, marking the steepest decline since March 2020.
The dramatic downturn wiped out tens of billions in shareholder wealth, rattling confidence among institutional and retail investors alike.
Major Shareholders Face Losses
The violent sell-off inflicted mark-to-market losses on some of the bank’s largest holders.
Notably, the Government of India and the Life Insurance Corporation of India (LIC) together recorded combined unrealized losses of over ₹1,400 crore as the stock slid on Monday.
Both entities had significant positions in the bank, and the erosion of value raised questions around portfolio risk for large institutional investors.
Haryana Government De-empanels Bank
In response to the fraud disclosure, the Finance Department of the Government of Haryana took decisive action by de-empanelling IDFC First Bank from its roster of approved banking partners for government business.
The directive instructs government departments and public sector entities to transfer funds to alternate authorized banks, citing concerns over the handling of government-linked accounts.
A similar directive impacted AU Small Finance Bank, which was also removed from the panel following alleged irregularities, although the latter has denied any financial impact at this stage.
RBI Response and Systemic Outlook
The Reserve Bank of India (RBI), India’s central bank and financial regulator, stated the incident does not pose a systemic risk to the broader banking sector, according to official comments released during a press briefing.
RBI Governor Sanjay Malhotra emphasized that the issue is confined to a specific set of accounts at the affected branch and has not spread to other segments of the bank’s operations. The central bank said it is closely monitoring developments as investigations proceed.
The regulator noted that steps are underway to recover funds, including potential legal and civil action against those responsible for the discrepancies.
Bank’s Statement and Audit Plans
IDFC First Bank has acknowledged the fraud and assured stakeholders that the matter remains isolated. The bank said it has appointed KPMG to conduct a comprehensive forensic audit and is working to recover misappropriated funds and rectify internal controls.
Bank management also outlined that insurance coverage is in place, which may mitigate losses up to a certain extent, although the fraud exceeded insured amounts.
CEO V. Vaidyanathan addressed the situation during a conference call with analysts, reiterating that the bank remains fundamentally profitable despite the setback and has taken swift remedial action.
Governance and Internal Control Concerns
The incident has reignited scrutiny over internal risk management and governance practices within Indian private banks.
Experts note that although digital threats and cyberattacks dominate headlines, traditional fraud methods like unauthorized transactions and forged cheques still pose significant risks when internal controls fail.
Despite advances in technology and regulatory oversight, the IDFC First Bank case highlights the persistent vulnerability of conventional banking operations to internal malfeasance.
Broader Sector Impact and Investor Sentiment
The fallout from the fraud has had broader implications for investor sentiment in the banking sector.
Bank stocks, particularly small and mid-cap lenders, saw increased volatility in trading sessions following the disclosure, as market participants reassessed risk exposure in light of potential governance failings.
While larger public sector banks and well-capitalized private lenders remain insulated to a degree, the episode serves as a cautionary signal for investors focused on corporate governance metrics.
Outlook: Recovery and Future Safeguards
As the forensic audit progresses, market watchers will be closely observing:
- Legal outcomes for suspended employees
- Recovery prospects through inter-bank claims and insurance
- Adjustments to internal control frameworks
- Impact on future deposit relationships with government entities
IDFC First Bank’s ability to navigate the crisis without broader reputational damage will play a key role in restoring investor confidence.
This story underscores how even established financial institutions with strong business models can face significant setbacks due to isolated but material internal fraud, eroding shareholder value and raising broader questions about governance effectiveness.