A fraud of ₹590 is being investigated at IDFC First Bank, with multiple issues arising due to poor internal controls and growing concerns for governance within the private Indian banking industry.
The investigation has shown that a significant amount of fraudulent activity was perpetrated through the use of false checks and the collusion of bank employees working as insiders.
The fraudulent activity came to the attention of investigators in response to Haryana’s desire to close their respective bank accounts, in an effort to transfer funds to another bank. Upon closing the accounts, it became clear to Himachal Government Accountancy Officers (GACs) that the actual balance was significantly lower than expected and that a significant amount of money had been withdrawn without proper authorization.
Four individuals were arrested by the Anti Corruption Bureau of Haryana, including a former branch manager, Ribhav Rishi, and relationship manager Abhay. Investigators had established that close to ₹300 Crores were transferred to Swastik Desh Projects, a business wholly owned by Rishi’s wife and brother-in-law, prior to funds being transferred to others.
According to investigators, fraudulent checks were used to circumvent the normal operational controls and to transfer funds out of the Department of Government Accounts (DGA) to other entities.
When Internal Bank Safeguards Failed
Most banks use strict ‘Maker-Checker’ processes whereby one employee initiates a transaction and another employee independently verifies the transaction before it is executed. In the case of large transfers of funds from government accounts, the bank must also obtain approval from a senior level employee before executing the transfer.
The magnitude of these fraudulent transfers indicates that there were significant internal control weaknesses and supervisory deficiencies in the banking system.
Typically, government accounts are reconciled on a regular basis, therefore it is very unusual that there were no audits performed over this much money in a timely manner. Investigators are investigating whether this fraud occurred over a significant period of time or was perpetrated internally at a faster rate.
IDFC First Bank repaid the full amount
In an effort to minimize the fallout from this incident IDFC First Bank has paid back the entire ₹583 crore claimed by the departments of the Government of Haryana.
According to the bank, this payment demonstrates a commitment to protecting the bank’s customers regardless of the ongoing investigation.
“We have paid back 100% of the principal and interest…in a prompt and principled manner,” states the official response from the bank.
Impact on deposits and banking reputation
The incident of fraud has had an instantaneous effect.
Departments, boards, and public sector units of the Haryana Government have been instructed to shut down their accounts with the bank and transfer their funds out. So far, ₹200 crore has been withdrawn.
Government deposits make up a relatively small percentage of the bank’s total deposits, but they are a significant asset for the bank, as they are low-cost and stable.
If a bank loses a large volume of government deposits, it will have increased funding costs and lower profitability at a time when banks are experiencing difficult liquidity conditions.
ALSO READ: How Bharti Airtel’s NBFC entry signals a new battle for India’s financial future
What this fraud means for India’s banking system
This incident shows a number of the key risks associated with the banking sector:
Insider fraud is still a significant risk.
Inadequate internal controls can permit large-scale financial crime.
Even if loss is recovered, trust and reputation suffer
The fact that customer money is returned does not alleviate concerns regarding the adequacy and quality of oversight, accountability, and risk management in private banks.
Authorities continue to investigate this incident and will evaluate whether any other individuals were also involved in what may be one of the largest banking frauds in India in recent history.
FOR MORE: https://civiclens.in/category/category-business-economy/
About the Author
