An alleged fraud of Rs 590 crore in the accounts of Haryana Government has been revealed in the IDFC First Bank branch in Chandigarh. After this incident came to light, the government’s stance has become quite strict. Haryana Government has removed IDFC First Bank and AU Small Finance Bank from the list of its government business with immediate effect. After this big decision, a new debate has erupted in the banking industry regarding the management of government accounts. The government is now keeping a close eye on small banks that violate rules and do not submit audit reports on time.
Shock to private banks, trouble to government banks
According to the report of Economics Times, big government banks are going to get the biggest benefit from this entire controversy. There is a strong possibility of low cost deposits i.e. CASA going out from private sector banks. Institutions like State Bank of India (SBI) and Punjab National Bank (PNB), which have a strong hold in government banking, will be the major beneficiaries of this potential change. According to Suresh Ganapathy, Head of Financial Services Research, Macquarie Capital, there will now be strict scrutiny of government deposits in private sector banks. In the medium term, some balance may be transferred to public sector banks. The CASA ratio in the banking system has already fallen by 500-600 basis points from the highest level since the Covid pandemic.
Direct impact on commission income
Private sector banks are already facing slow pace in raising deposits. The share of state and central governments in the total deposits of IDFC First Bank is about 8 to 10 percent. If money from government accounts comes out of the accounts of private banks in large quantities, then the financial pressure on these banks will increase to a great extent. Senior Vice President of IIFL Rikin Shah believes that PNB, SBI, Canara and Union Bank can benefit from this withdrawal. Apart from this, the decline in government business will also have a direct negative impact on the agency commission income of private banks. This is the fee that the Reserve Bank of India (RBI) pays to banks for handling government transactions.
What is the clarification of IDFC and AU Bank on the allegations?
Amidst these serious allegations and action, IDFC First Bank Managing Director V Vaidyanathan has assured investors. He said that his relations with the government are deep and this is not a systemic issue. The Bank is fully committed to further strengthening its processes and service standards so that such incidents are not repeated.
At the same time, AU Small Finance Bank has clarified that there has been no fraud in their bank. According to the bank, the deposits of Haryana government have decreased from Rs 735 crore to Rs 538 crore. Whatever transactions took place were duly authorized by the concerned government department and were done as per normal business process.
Also read- When and how did the scam happen in IDFC First Bank, why did AU Bank get hit?