IDFC First Bank Limited (539437) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to conference call of IDFC First Bank on recent developments [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. V. Vaidyanathan. Thank you, and over to you, sir.

Good morning, everybody. This is Vaidyanathan.

Good morning, everyone. I'm Sudhanshu Jain.

Good morning, everyone. This is Saptarshi.

Yes. Maybe I'll -- before I invite Mr. Vaidyanathan, maybe I'll just give a brief synopsis of the matter. We did make 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 work 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 audit. 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 controls 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 of our branch, which has come to our notice. In terms of financial impact, the discrepancy currently found is about INR 490 crores. We have additionally -- where we have received, I would say, certain reconciliation requirements. So then through the reconciliation, we observed that there is a discrepancy of INR 490 crores. We have additionally estimated INR 100 crores. That's how it comes to INR 590 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 the 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, I 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. So -- and we are making all efforts to trace the flow of funds and seek appropriate restoration of funds. With this, maybe I'll ask Mr. Vaidyanathan to add further color on this one.

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 the recoveries will come, et cetera. 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 therefore, we should -- we will -- 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 bank from the client's account. Now they've also used checks when looked in hindsight, looks forged, but someone has cleared it. So this looks to us on the basis of the work we have 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 10 years. And we have never seen an instance like this 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 a technology-first bank. And on all fronts, like mule and AML, et cetera, bank is doing very well in terms of overall numbers and controls and so on. But this is not a digital transaction. This is a physical transaction where people have come -- the checks have been forged. This is the -- let me say, the oldest kind of fraud probably known to banking. So how this has happened is obviously happened at the connivance of employees. There is maker, checker, authorizer and the whole system exists, but obviously, some bunch of people have come together and 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 -- and appointed a forensic auditor for this, KPMG, and we will expect them to move 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 -- core of the bank, it is now -- the 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 upward of 5.8% or 5.7% last quarter, but this quarter, we expect to 5.8%. So on the base of that strong strength, we feel that this is an incident that will pass. But this incident will not -- this incident has passed through the P&L as and when it comes, and we will take it out. But I can tell you this incident has not passed 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, et cetera. And we will make the necessary amendments to contain this from here on. We have done a discussion with our employees last night across the country and people have come across and said that they are holding fort very well. They're comfortable with the situation. Every one of them is proud about the fact that they're working with the bank and the bank is dealing with all matters so clearly, ethically, decisively and transparently. And they are very proud of the service levels of the bank. They're proud of the technology we provide, proud of the products we provide to the customers, which are really customer-first products, about the way we deal with our customers. So there is a strong degree of confidence in a cultural sense. There is a strong degree of confidence in the people. Our Board has been taken through the full matter, and they have given certain guidances, but at the same time has full support. We have taken the regulator past the matter, and they have given us their inputs and guidance. We have spoken to a few media channels who talked to us yesterday. So we have done. We have been all of yesterday being involved in dealing with the situation. But I can broadly tell you that the bank is in full control and transactions across the country will happen smoothly. And this is an isolated case. We in the last 5 years, 7 years, have put up over 1,000 branches, cumulatively, maybe over 1,050 or 1,060. And we have really not seen any incident of this nature that has happened here. So -- but this incident is a further opener for us. We will check one more time, implement necessary controls and keep going. And I do feel that a quarter ahead, hopefully, you will look through this incident. So once again, for people who have joined the call, thank you for joining, and feel free to ask the questions, please.

[Operator Instructions] Our first question comes from the line of Kunal Shah from Citigroup.

A few questions. Firstly, in terms of the impact, as you indicated, the aggregate amount involved in the reconciliation is almost like INR 590-odd crores. And given that the money maybe the other bank has also filed in terms of the credits being received from us in to the extent of like, say, INR 25 crores, INR 47-odd crores. So in that sense, 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 -- basically, we are doing a layer by level 1, level 2, level 3, meaning layer 1, layer 2, layer 3, 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 be able to block the money and try to recover those dues.

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 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 INR 200-odd crores here. But we feel since the overall number itself is small, it should be quite manageable.

Okay. Okay. And this 0.5% would be after this INR 200 crores of outflow?

Yes, I'm saying even if...

For a bank of about INR 2.8 lakh crores of deposits like INR 200 crores is not the item, yes.

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 an authorization framework. There is a maker, checker, authorizer systems in banks as in case -- certainly in the case of ours. And then there is a process for even normal customers, not just for government -- not for government, not for large transactions, but for individual customers, there's a positive confirmation from customers for transaction value above INR 5 lakhs, the branch staff calls the customer to confirm the transaction before processing the check. So the bank also offers customers a system of something called positive pay, where the customer can positively confirm the check issued by them, meaning that the customer is issued a check of a certain amount, customer can come to the app and specifically authorize the transaction, that's a positive pay. So these things do exist. But of course, the positive pay with the customer has to specifically come and voluntarily subscribe to it because we cannot enforce it because then checks will -- even genuine check may return. The other thing is that there is additional verification of high-value transactions for transaction value about INR 10 lakh, additional verifier verifies that the transaction has been correctly executed by the maker, checker. So there are really many, many checks and balances. The issue in this case is that many of these people connived in making it happen. Now in terms of what new controls we will implement, this is a quick one on the basis of the last 3 days work. But of course, we will do more as it is progress. There is a -- 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. The customers' confirmation will then be captured through a verified digital channel with a stipulated window, meaning that the customer, we will -- for example, if you want to clear a particular transaction, we don't have to really call you. We will trigger an alert for you to specifically go to your app and say that, yes, please clear the transaction. So this is a specific control will bring extra control. Now with the arrival of AI, we are also going to additionally bring -- currently, before the arrival AI until the banking till date, the authorizer, the branch manager physically sees the check and confirm signatures are matching and clearing it. But now we will put a system whereby through AI, the AI will do an initial checking, and then it will be double confirmed by the human. So therefore, exceptions handling will be better controlled. So we will -- see, this is not an electronic transaction, so to say. This is a physical check, manual check, a debit instruction that has come, like I said, the most traditional kind of fraud that has happened here. So we will improvise upon that and put some new controls on this. But frankly, we definitely feel that the overall -- the banks -- the overall system at the bank is something that will further enhance based on the experiences we get from this incident. And we will deeply study how collusion happened and how we can prevent collusion that could be the other route matter.

And just one more thing. Further to add, we had also sent out transaction alerts, monthly bank statements, monthly balance confirmation we had sought. So all of those processes are run through systems, and those controls are very much in place.

That's an important point Sudhanshu has raised. Even in this case, SMS alerts have gone, balance confirmation certificates have gone. So all that has been going on in this case as part of the process.

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 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 5 years from AA- to AA and from AA to AA+. And you can clearly see the direction of travel of the bank rating. Our net worth is over INR 46,000 crores. Our customer business, which is both deposits and loans, is now touched INR 5. 6 lakh crores, and you can see the growth over the last 5 years. You can see how the operating profit has risen from a few thousand crores to over INR 7,000 crores. So there are -- the bank is on a very strong trajectory. So we feel that people will take care of it. And we are very sensitive to all government accounts as much as we are with the end customers. So our intention is not to really to litigate this or anything like that, where we have -- if we have made a mistake, we will own it up straightforward, and we will do whatever required to be done. And if there is anything in the gray zone where we feel the counterparties -- employees of counterparties are involved, we will speak with them as conducively as possible and try to find a meaningful solution. So we basically don't mean to give a choice. We don't mean to litigate this unnecessarily. We believe that completely being fair. And if something is a responsibility, we will admit it, and we will move with it.

Our next question comes from the line of Piran Engineer from CLSA.

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, there is -- this can become a legal matter. Anything we say at this point of time will be -- we'll have to be very careful. So let me just say that it is -- in a significant way, when -- 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. And -- but it accelerated during the last 3 days from February 18 onwards. So let me say, largely the actions that have been taken have been momentarily spotted this after February 18 to date is when the action has accelerated so much here.

And just to add that whatever these requests which we have received so far, there the difference or the discrepancy, which we have observed currently is to the tune of about INR 490 crores. Additionally, we have scanned the rest of the accounts as well from where we have self-identified about INR 100-odd crores. That's why we feel that the impact on the discrepancy amount could be more around the INR 590 crores, which we have quoted in the release. And of course, as Vaidya said earlier, these numbers could move from here. We could also get recoveries through these accounts. The legal process could itself establish and validate some of these claims. So we would give an update once this entire process is concluded.

So this INR 590 crores is the summation, as Sudhanshu mentioned, is the INR 490 crores is what to the extent when they ask for balance confirmations vis-a-vis what we saw in the bank of the bank account of those clients. That is the difference. That is INR 490 crores. INR 100 crores, Sudhanshu mentioned is the extra diligence that we went and check other bank accounts and so on and so forth. This is a bit of our own estimate at this point of time. But we think we're broadly right in the numbers we put out and we put it out in good faith, the extra INR 100 crores. Now the next point is on this front is that like Sudhanshu said that if the recovery that comes to the process, we will -- the impact will be reduced to that extent. Hopefully, not extra -- any more claims are going to come. We don't know, but we will deal with it as it comes. But we -- our good faith assessment is that at this point of time, this is approximately the number that we said is approximately correct.

And sorry, just one more thing to add, we also have an employee dishonesty policy. Of course, the amount there is about INR 35-odd crores. So to that extent, some amount could be negative.

Some amount will be negative to the extent...

What is INR 35 crores?

Yes, employee dishonesty policy, which we have taken at a bank level to cover some of these.

Insurance, okay. Got it...

So the final impact there will depend on some of these factors recovery, the insurance that we have, an extra claim. We'll take it as it comes. And -- but I want to just say, Piran, that whatever it is, we will deal with it and decisively deal with it in a matter that is most fair and appropriate according to our -- as it goes.

Yes. No, my question came from the point of view, if it's been happening for a long time, 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'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, et cetera, 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 are -- if that component is identified or covered, I'm sure they will also look into the matter. There 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. And then take it from there because as you know, we don't postpone things. That's the reason instead of counting as INR 490 crores, we put it as INR 590 crores because we really don't want to postpone and leak the market with more and more news. So we have proactively done extra work, proactively identified extra accounts, proactively put INR 100 crores into it and then hoping that that's how we do this. And as you -- all of you who know us for maybe 15, 20 years would know that we don't postpone things when it comes to accounting or governance.

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, it should -- the checker should be someone who is not in touch or knows the maker.

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

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

Got it.

But that includes central government, state government. And frankly, many of these organizations have a long track record with us for running back to 7, 8, 10 years. It's just not about just deposits, just for information. It is basically providing a bunch of solutions. So -- and on the solutions front, like many of are a customers' customers and you -- hopefully, you would have seen the quality of the services we provide at the branch, on the Internet, on the mobile banking, on the call center, et cetera, and the products. Similarly, on the government banking side also, it's not only about taking deposits from them. We are providing solutions from them. We are deeply integrated with them. We collect tax for them, both state taxes as well as central taxes, the GST, the CBDT and so on. So I just want to let you know that it is not the bank has taken some deposits from government. We have given deep solutions to them. For example, we -- these are endpoint customers that we collect from and pay them the taxes and there's an agency business going here. So we have a deep thick relationship with all of them. And therefore, we believe that this will be a matter that we will be able to handle and manage comfortably. And the business of the bank is growing. So it is obvious that the services of the bank are appreciated by them for -- that the business is expanding with IDFC in this case. So as you know, deposits of the bank is growing by about 20% to 25%. And similarly, government banking business is also growing by that order of magnitude. So we have deep relationship with these people. I don't think we should really concern that the whole system will have a concern or anything like that. But we will still improve on our services from here on.

Our next question comes from the line of [ Vincent ] from Principal AM.

I'd like to ask, since February 18 this year, what other communications from other government related or linked clients or accounts have we received related to this matter?

Nothing, nothing apart from what has come from this government -- state government department, nothing else. Like I said, we are enjoying good relationship...

So, no other.

Yes. No, no other. And the -- like I said, we enjoy a good relationship with the ecosystem. And then the -- we are deeply integrated. It's a very important point for you to take note of. It's deeply like system-to-system, host-to-host integrations are on. So it's a running machinery. It's not only that somebody has left deposits with us. And to your second point, of course, that even for this -- in this case, like someone else pointed out, that looks like there is a connivance of multiple parties. And therefore, why should only IDFC First Bank pay for this. There are multiple -- we are evaluating all of these things in a legal sense. And our general approach is -- I'd like to say that, that our general approach is that if we feel with a hand on heart that this is our bank's mistake, then we have -- we will not litigate these things. We will just do -- we will pay up. If we feel that there are multiple parties involved and other people also has to have responsibility, then we will go as per the process of law. But we intend to deal with this in an amicable manner with the entire ecosystem.

And Vincent, just to add -- just to reiterate, the discrepancies which we have got pertains only to this branch, no other branch.

This is very important what Sudhanshu pointed out.

I want to keep reiterating that.

Yes. No, thanks for that. One important point, See, we are running over 1,000 branches. And frankly, 1,000 branches for -- starting from, say, 206 branches in 2018, December to 1,000 today, more than 1,000. And really from 1,000 branches, we've not had these issues. One branch has happened, nothing that we want -- it's a serious enough matter for us to learn from it. But it's one branch, one client group. So we will deal with this. This is a very isolated instance. And other employees of the bank are -- the check and control of the bank are thick, strong, and many of them are technology-based.

So since 5 days ago, there's no other communications with other clients on this matter, yes?

No, we have not got any inward calls from any of these people at all.

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

Yes. Sudhanshu mentioned that a moment earlier. We have employee dishonesty insurance of about INR 30-odd crores in this case.

INR 35 crores.

INR 35 crores.

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. In this case, these are system triggered. This is important to note. These are system triggered SMS, e-mail alerts for every transaction have 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.

So the client acknowledged that they received these statements?

These are systems generated.

Yes. So these statements have, as I said, transaction alerts have been sent to the mobile number and statements have been sent on to the authorized e-mail IDs, and this has been sent on a periodic basis.

Sudhanshu, I just want to understand on receipt of the statements. And in fact, in the last 5 days, did the client acknowledge that there was a lapse in their process and they have, in fact, received the statements.

So we feel that statements have certainly been sent and would have been received. One of the clients have come back with certain discrepancy and then this reconciliation process is underway with a few more clients, and that's how we have assessed the discrepancy amount. Of course, we will now wait for this process to get over.

See, these are the kind of things that we got to -- we will get into the depth of it. That's what the bank has triggered the alerts. So -- and in fact, there are normal clauses that if you find a discrepancy with the statement, please get back to us immediately. So this is a normal banking convention and disclaimers when banks send because when banks send statement of accounts and banks send SMS. So these things have been -- are there, and these will come up as a subject of discussion during the whole process.

So just one more, sorry. I mean, since I think it's very important for any bank to get this right, which is the statements are true and accurate. It's just that the client did not -- was not aware that certain employees had initiated the debit.

No, no. But irrespective of the checks were forged and they were paid out, assuming that they were -- when you look in hindsight and check the signature and assuming they're not exactly tallying to the T. And so even if that be so, the bank has -- there is a certain bank balance that is reflecting on the books of the account that has been sent out to the parties. But like we said, these are part of the evaluation of the processes that will come up, whether about the delivery, about the responsibilities and so on. And we will take it as part of the process, and we will handle it as it comes.

Well, sorry, I just need to get this right, which is accounting for the fraudulent transactions. After that, the statements are true and accurate.

Yes.

Had the transactions happened, the balance are accurate?

No, no, obviously, because to the extent -- let us say that a bank account is INR 100 and suppose INR 20 has been taken out -- a check has been passed out to INR 20. The balance INR 80 is the balance in the books of the account, and that is what the statement of account will go for. That was the -- yes. So that is what 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 absolutely true and accurate.

Okay, that's clear.

This is very important. I'm so happy you asked the question. Yes. So there's no error in the statement. Statement reflect what the system balance shows. If a transaction -- fraudulent transactions happen, so if it happened, that has gone -- so that is a fraudulent transaction. But bank balance is correct. The transaction is correct. It has happened and the customer has been told. So there is absolutely no system error, system to put the correct balance and customers was sent the right balance.

Our next question comes from the line of Param Subramanian from Investec.

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, that's my first question.

We are working out the scope at this point in time. Maybe Sudhanshu can throw light, Sudhanshu?

Yes. So 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. We have appointed KPMG only yesterday. So we'll get into some of those nitty-gritties during the course. And typically, it depends on the investigation, of course. Typically, to my best of my understanding, these processes could take about 4 to 5 weeks to conclude.

4 to 5 weeks. Okay. And it is specific to the branch. Okay. Secondly, this was asked previously, what is the exposure of the bank to all state governments and central governments broadly as a percentage of deposits?

I thought Sudhanshu just answered that earlier because it's...

About 8% to 10% of our total deposits. To state government, central government, PSU entities.

And it's been typically growing in line with the overall book of the bank, so to say, somewhere in that zone.

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 your, say, higher value deposit balances because we have only 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 color on that relatively? And secondly, we are talking about, say, a tight control on costs going ahead. Will this have any implications on that? Because I heard you mentioned earlier that we are undertaking a review of our processes, et cetera. So any impact on, say, both of these things?

Sorry, I didn't understand last word review off, but let me fill it in for you because I couldn't hear you well. But I got the spirit of your question. So the -- what I meant is I didn't hear the tail of your question, rest I've heard. Now the...

So if I could mention that. Yes, yes. So I meant since we are undertaking a review of processes across the bank, I think you called that out. And of course, we are in the process of consolidating our costs. So will there be impact of this on that?

Okay. Okay. Got it. Got the question. So first of all, you see the banks largely, let me say, while this is a collision of employee case, the bank systems are already in place. Let me just share with you that for a bank to run so well, you may have noticed that it's been like 10 years, there has never been a single smell about the bank in the market about either experienced by customers or even any incident like this. So obviously, let me just say that systems of 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 collusion risk. The systems as such are running really well and fine. So we don't expect that because of this, we had to put so many new control that's going to impact the cost of the bank or nothing like that. So I think we don't think so. If anything, if you incur a small cost towards the part of control, it's probably a good cost to incur. But we don't expect any material cost coming from that. Your second question is the bank reduced interest rates so sharply recently. Well, the truth -- the fact is that we -- yes, we have dropped interest rates. But the deposits have continued to come well from -- even after we dropped the rates, and it's quite comfortable. And number three, we believe that over the last maybe many years, maybe 7 or 8 years, the bank has built a really good brand. the bank has built -- culturally, if you see -- if you notice, the banks appreciated for its culture, even employees, how they experience the culture and how they spread the word around in the market among their friends, families, relatives and everybody has bank account with us. The smell of the bank is very, very good, which is a very difficult thing to achieve. It's not about advertisement. Advertisement is about how much money you spend, but experience is the hardest to gain. And the bank has built that experiences. The bank has built in terms of deposit growth, bank has built a really good mobile app. Bank has built hyper-personalization capabilities. Bank has built data lake, analytics, machine learning, artificial intelligence and hyper-personalization, anti-spanning rules, anti-repetition rules. These are like -- and very good design layer, the UI/UX layer, the experience layer, the -- and the response times are really good. So what I'm trying to say is that the bank has built really good capabilities and all of -- and relationship management and service capabilities and service center. So bank has built such a fantastic stack of capabilities, but really deposits are coming from the full stack. So that's very important to note. And we believe that one incident of one branch in one location, people will look through and deposit will continue to grow. And if anyway results will come out, we'll share with you results of deposits this quarter also.

And Param, just to add, we maintain liquidity levels, and we will, of course, closely monitor the situation.

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 maintaining. So 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. You know our bank. We always keep high capital adequacy more than requirement. We always do retailization more than the 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 it's been 7 years on an average on an incremental basis. The stock was higher. It's now come down below to comfortable levels. But basically, you can see that incremental has been 75%. So we run the bank really very, very conservatively. We take no chances at all. And we have very low levels of certificate of deposits. You could have heard from the market that certificate deposits have gone up to INR 5.5 lakh crores in the system. IDFC has hardly taken certificate deposits, we keep it very low. So we run the bank through core high-quality retail deposit franchise from individual customers. So we run the bank. So not to worry, we always -- these are our principles of running the bank and never take chances, and that's how we run it.

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 the 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? Because 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?

Clearly, employee collision risk, if a maker, checker, authorizer, everybody in a branch compromises with the counterparty on the outside and clears a fraudulent check or creates a fraudulent transaction, maybe in this case, even with the multiple parties. So this is a kind of a stuff that can happen, frankly, with -- that can happen anywhere, that too in this a traditional -- the oldest kind of fraud of a check and that kind of stuff. But really, this is -- but 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 our -- we need to think a little deeper about how we could have stopped dealt with the collusion. This is not a system failure. This is not electronic system failure. This is not -- the systems are running -- holding us very well. This is a collusion of individuals. So we will reflect on this. We'll definitely reflect on this, and we will take some very decisive moves about how we will prevent this going forward. And we really would be -- never want to see another incident like this in our lifetime in this bank again. We will make some very, very decisive moves.

Next question comes from the line of Prakhar Sharma from Jefferies.

I just wanted to ask if it will be possible. See, the biggest question that all of us are trying to wonder is, is this one branch, one government issue? Or is there is any chance that maybe a month or 2 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 been observed. That will give immense clarity to the market not to kind of extrapolate this issue beyond what has come over the weekend, if that's possible?

Yes, this is a good point. It's 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.

Ladies and gentlemen, due to the time constraint, that was the last question for today. I would like to hand the...

No, no, that's fine. In case -- I don't want to cut out anybody. If anybody else has any questions, please feel free.

[Operator Instructions] Our next question comes from the line of Subir Sen from Aditya Birla Sun Life Insurance.

Just wanted a small clarification that INR 490 crores plus INR 100 crores, which you mentioned, that INR 100 crores also pertains to Haryana government?

Yes, yes.

And this is only one account and one check or there are multiple checks and multiple accounts?

I think these are multiple.

It pertains to that branch only.

Again, they also pertain to that branch.

INR 100 crores also.

Our next question comes from the line of Nitin Aggarwal from Motilal Oswal.

Just sir, one small question. Like this money that has gone out INR 590 crores, is it all to the private banks or some PSU banks also there? And only 2 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 some rationale on all this de-empanelment?

Money has gone to many other banks actually in the system. So -- and even those banks are cooperating the process. So we've reached out to many of them, and they're all highly cooperative. With regard to the -- what is the second question?

The de-empanelment has happened only for 2 banks, whereas multiple banks?

That we can understand from their point of view, from the counterparty's point of view, 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 give the necessary assurances and come back in the game. And in many occasions, as Nitin, you know the bank for long. We have really -- you know where we've come from this bank. We really -- so I think we covered a lot of ground. We will cover ground on this front as well and win back the confidence of that client.

Our next question comes from the line of Deepak Gupta from JM Mutual Fund.

I just wanted to understand the time line 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 earlier that there are certain things which are 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 what they assumed or thought basically the books of accounts, there was a difference, and that's how we surfaced this. But really, what we have done is that apart from the INR 490 crores that came out, we have independently self-evaluated the rest of the system. We have found a gap of INR 100 crores. We have put everything together, and we want to announce to everybody one shot so that they don't have to come back to you again. This is our intent at this point of time.

Understand that. And sir, given the fact that there has been wrongdoing from the government side as well probably and the investigations 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 a 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 very well be right that there could be errors from the other party as well. There could be error from the -- some colluding party for the beneficiaries. So all that responsibility will be attached. Now your question is that why should IDFC Bank foot the bill for the entire amount, multiple parties are involved and other parties are also involved. That is something we will establish at the point -- as it goes. But our intention, generally as an approach, as a bank, as a management is whatever is fair has to be done. 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. So I think -- anybody else want to ask a question?

Our next question comes from the line of Jayant from Axis Capital.

One question I wanted to ask on the -- what would be the size of government, state government deposits in our overall deposits? And do you see any impact?

I thought Sudhanshu already answered that, that -- and also with regard -- maybe you joined late. And sorry, you didn't finish the second part of the question.

Second question was that only, sir, is that -- I'm sorry if it's already answered, but do you see any impact from other state governments in North from this?

Yes, I think that question was already answered. We have already -- but since you're coming in late, maybe I'll just quickly -- in 10 seconds, I'll finish -- I'll answer this, that our -- we have a deep, strong relationship with everybody. Our systems are deeply integrated 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 is just so much more we do with them. It's like deeply integrated relationship. We expect the relationship to do -- 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 and long-term rating. These are very high ratings and increasing if you see the trend. So we are a good bank, good capital adequacy, good balance sheet size, good culture, good systems, deep integration. So we have many things going in our favor and good relationship management and people who don't litigate unnecessary. So we -- I believe the way we will -- our conduct, we will demonstrate to our conduct that we dealt well in this matter, and we will continue to enjoy the confidence of the people. I think -- okay. Can you take the last question, friends because I think we've been at this. .

We'll take the last question from Siva Natarajan from Principal Asset Management.

Just following up on an explanation you gave earlier. Is the process for authenticating and clearing a physical check at IDFC the same as other large private banks?

Yes, 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 in collusion -- it's a collusion risk. It can happen -- 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 are the same. We do validation, the eye-to-eye checking of the check versus the system or the -- the process is the 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, et cetera. All that has been followed in this case. And then these are followed up with sending a communication system generated statement to the registered customer IDs, mobile alerts, SMS alerts, monthly bank statements, monthly balance confirmation certificates, all of these things go to the customer. So these are the standard process of the banking system. So with your permission, friends, can I please close this call? Moderator, can I go ahead because it's been like it's like touching 9. The -- I'd like to just conclude by saying one thing that this incident, of course, has deeply disturbed us because -- not because of the -- of anything else because the bank has had a sterling record on operational excellence for the last 10 years, like I said before, not a single smell like this in 10 years of operation and in the last 7 years post-merger as well. So when that story gets disturbed by one incident, it has disturbed us. We are not going to let this go in waste. We are going to get to it. If it's collusion of the key risk, then we will address collusion. And if there are any other systems also, we'll address it. Maybe we'll discover if we discover anything. And that's one. Number two, we would like to point out that the core operations of the bank is very important for you to -- we request to take note of. This incident disturbed you also. We feel we really regret that it shouldn't have happened, particularly the magnitude of the issue is more and we -- that also disturbs us. But coming back to it, so -- but when you look back, I want to just share with all of you that this bank has come through from the situation we were, let me say, in -- at the time of merger, the core operating profit of the bank is very strong. Our ability to take some of these hits today is better than ever before. At the -- and that is -- the core strength is strong. When you look up -- look through this, hopefully, all of you will look through this for 1 quarter. We have not yet decided what we'll provide and not provide, but you assume that we will take some provisions for this, please assume that. And we believe that the bank because the net interest margin is expected to increase, the credit cost is expected to go down this quarter. So we were -- on the stand-alone basis, we were expecting a very solid quarter this Q4 in terms of profitability. We were expecting -- you should see last 2 quarters have gone up from INR 350 crores to INR 500 crores. We were expecting a higher number this quarter. So we were ability -- this is our normal base case expectation. Of course, despite this hit, if we were to take one, we still expect to be profitable. This is our estimates at this point of time. So we believe that hopefully, when you will wake up a quarter from now, you will look through this. We will not look through it, but hopefully, you will look through this. And maybe from there on, we will emerge stronger. I want to take this opportunity of even sharing with all our employees that we have come through a lot to become a strong bank now, and we rated what we are, and we will come out stronger from this. We will emerge stronger. We are confident about that.

Thank you, sir. Ladies and gentlemen, on behalf of IDFC First Bank, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.