AU Small Finance Bank has started an internal probe and put certain employees “off duty until investigations” after the Haryana state de-empanelled it from undertaking any government business.

Analysts say the financial impact on AU will be limited as deposits linked to the Haryana government are small compared to the bank’s overall base. 

AU had Rs 538 crore in deposits from the Haryana government as on 21 February 2026, which is 0.4% of the bank’s overall deposit base of Rs 1.38 lakh crore as on 31 December 2025.

AU has stated that there is “no indication of any financial impact or any fraudulent activity” based on “available facts at this stage” and “preliminary review”.    

The lender has also stated that it followed all due processes and will seek clarification from the Haryana government on the reasons for de-empanelment. 

On 22 February, AU Small Finance Bank (SFB) was de-empanelled for Haryana government business until further orders. This meant that no state funds will be allowed to be deposited, invested or transacted through AU SFB.

Background

On 16 February, AU SFB received a communication from a department of the Haryana government seeking account opening and transaction details relating to one specific account opened by it. The lender submitted all related details.

On 18 February, it received another communication from the department seeking information regarding suspected unauthorised transactions between the government account and another customer account with the bank.

Later, on the same day, the state Finance department communicated to the bank about its de empanelment for government business in Haryana.

Preliminary findings

The bank initiated an internal review and found that both these accounts were duly opened after completion of all applicable KYC checks and requisite authorisations and in accordance with the bank’s internal policies and processes.

The bank also reviewed all the transactions in the government account. This was opened with an initial credit of Rs 25 crore transferred from a large private sector bank.

AU SFB further clarified that additional credits of Rs 47 crore were subsequently received through multiple transactions from another private sector bank, which has recently provided public disclosure of unauthorized and suspected fraudulent activities.

Out of the total credits received in the government account, Rs 47 crore were transferred to the customer account through 14 transactions.

AU said as per its preliminary findings, all these 14 transactions were initiated by the concerned government department, duly authorised and executed in accordance with the instructions provided by the department, in the normal course of business.

The bank has a “complete audit trail and all details including account opening forms, KYC documentation, cheques and other transaction instructions, verification call details and supporting records”.

The bank’s disclosures indicate that documentation and internal checks were in place for the transactions under review.

The government account was closed on 15 January following instructions from the department and the outstanding balance of Rs 25 crore with accrued interest was transferred back to the original large private sector bank.

Measures taken

The bank has informed the board and has continued its internal review on the matter.

“To ensure a fair and transparent review, certain employees have been placed offduty,” the SFB said in a regulatory filing.

The bank is also engaging with the Haryana government for assessing the reasons for de-empanelment and will fully cooperate with the government and any other authorities as required, it added.

Elaborating on the developments, AU SFB said it had total deposits of Rs 735 crore from the Haryana government as on 17 February 2026, which has reduced to Rs 538 crore as on 21 February across 200 accounts, post this de-empanelment.

“We reiterate our commitment to strong governance, transparency and the safeguarding of public funds and will continue to engage with the Haryana government for re-empanelment and communicate with all other stakeholders,” the bank said.

Analysts are in wait mode to gauge how deep the impact will be on AU SFB after the Haryana government’s de-empanelment. “Though the immediate impact may be negligible, one needs to see how this trickles down to the next quarter on the deposit side at a government and a retail level,” an analyst at a broking firm said.