Market Brief: Government Deposit Shift & Private Banking Scrutiny The landscape for government deposits in India is shifting following high-profile discrepancies involving state funds at private lenders. The Haryana government has officially de-empanelled IDFC First Bank and AU Small Finance Bank with immediate effect. This directive bars all state departments, boards, and corporations from parking, investing, or transacting funds through these institutions. The move follows the disclosure of a ₹590 crore fraud at IDFC First Bank’s Chandigarh branch. The discrepancy, involving Haryana government-linked accounts, represents roughly 20% of the bank's projected pre-tax profit for the 2026 fiscal year. In a parallel development, AU Small Finance Bank faced scrutiny over ₹47 crore in transactions, leading to a sharp decline in its Haryana government deposits from ₹735 crore to ₹538 crore within a single week in February 2026. Market sentiment reacted sharply to these events. Shares of IDFC First Bank plummeted by 20% in a single session, erasing approximately ₹14,000 crore in market capitalization. AU Small Finance Bank shares also fell by 10% following the de-empanelment news. Investors are closely monitoring the potential for a broader contagion effect as other state governments re-evaluate their exposure to private sector lenders. A significant migration of funds toward state-run institutions like State Bank of India (SBI) and Punjab National Bank (PNB) is now anticipated. The Haryana government has already directed its entities to prioritize nationalized banks for all future banking relationships. This flight to safety could reverse recent trends where private banks were gaining deposit market share, which had reached 34.8% by March 2025. The impact on low-cost deposits is a primary concern for the private banking sector. Government funds typically provide a stable source of Current Account and Savings Account (CASA) deposits. A mass withdrawal could tighten liquidity and increase funding costs for private lenders, who may now need to offer higher interest rates on term deposits to retain their capital base. Operational oversight is also under the spotlight. The fraud at IDFC First Bank was only discovered when the government attempted to close an account, revealing a mismatch between reported and actual balances. Consequently, the Haryana finance department has mandated a full reconciliation of all government bank accounts by March 31, 2026, signaling a period of heightened compliance and tighter auditing across the industry.