How the Rs 590-crore fraud unfolded at IDFC Bank branch

To put it simply, cheques were presented to the bank’s branch — mostly by an external party — and employees who were in connivance took steps to clear them. The money went to accounts outside the bank. These accounts are also expected to be suspicious.

And how did the fraudsters get hold of the cheques? This would have been facilitated by the employees, who also forged the requisite signatures.

How was the fraud detected?

It was apparently not the bank that detected the fraud. The Haryana government noticed glitches and asked for statements, which did not tally. Then, when the government requested to transfer its funds to another bank about a month ago, the bank saw that the money was not reconciling with what the department thought was in the account. The action accelerated after February 18.

The trigger was the discrepancy of Rs 490 crore found during balance confirmations. The bank independently self-evaluated and found an additional Rs 100-crore gap across other accounts.

While the bank claims there are excellent controls in place, they failed in this case because of collusion by its employees.

Moreover, when high-value cheques were issued, it is surprising that senior officials failed to check the veracity of such transfers.

How did the client receive monthly statements and not notice this?

There are system-triggered SMS and email alerts for every transaction. The account holder (the Haryana Development and Panchayats Department) should have got the alert. But the employees involved could have manipulated the system so that the alerts did not go to the account holder.

“This will be examined as part of the evaluation of responsibility. Alerts were sent to the authorised email ID and mobile numbers on a periodic basis. One of the clients came back with a discrepancy, and that’s how we discovered this,” IDFC Bank MD and CEO V Vaidyanathan said.

Where has the money gone?

The money has apparently gone to many other banks. “Those banks are cooperating. Regarding the de-panelment, that is a natural reaction from the counterparties. It is our responsibility to do better, provide necessary assurances, and get back into the game. We will win back the confidence of that client,” Vaidyanathan said.

“To the extent that money is lying in accounts and has not left the system, we will be able to block those funds and try to recover them,” Vaidyanathan said.

The role of auditors is also under the scanner, as they failed to detect the fraud. Details of the involvement of third parties will emerge post the forensic audit the bank has initiated with KPMG and investigations by law enforcement agencies.

What is the bank planning?

The bank is planning an explicit system-based confirmation for branch-based transactions exceeding a predefined threshold. “We will trigger an alert for the customer to authorise the transaction via their app. We will additionally bring a system where AI performs the initial checking before a human double-confirms signatures, improving exception handling,” he said.

The bank said it has a proper governance framework, defined standard operating procedures (SOPs), and an authorisation framework with maker, checker and authoriser systems. For individual customers, there is positive confirmation for transactions above Rs 5 lakh, where staff call the customer. It also offers “positive pay”, where customers can confirm cheques through the app. Additionally, for high-value transactions above Rs 10 lakh, an additional verifier ensures the transaction is correctly executed.

However, this framework collapsed in the Haryana govt’s account as employees gamed the system, it appears.

How much are Haryana govt’s deposits?

The Haryana government’s deposits are roughly 0.5% of the bank’s total deposits of Rs 2.83 lakh crore. Since the notification came a couple of days back, the bank has seen an outflow of about Rs 200 crore. Since the overall number is small, it should be quite manageable, Vaidyanathan said.

The total government deposits with the bank are about 8-10%. That includes central government, state government and PSU entities. “Many of these organisations have a long track record with us. It is not just about deposits; we provide a bunch of solutions. We collect GST, CBDT, and other state and central taxes. We have a deep relationship with the government banking ecosystem. We believe this is a matter we will be able to handle and manage comfortably,” he said.