NEW DELHI/MUMBAI, (Reuters) – India’s reputation as a place to do business took another hit after the scandal-tainted government charged top public sector bankers with accepting bribes initially estimated at hundreds of millions of dollars.
The scandal is one of the biggest to taint India, potentially harming the image of Asia’s third-largest economy as destination for foreign investors, especially as it comes a few days after Prime Minister Manmohan Singh has had to defend his government in another graft scandal involving telecoms licences sold at rock-bottom prices.
The federal Central Bureau of Investigation (CBI) on Wednesday arrested five officials from state-run listed lenders, including the chief executive of LIC Housing Finance <LICH.BO>, accused of taking bribes to facilitate large corporate loans.
Three senior executives from a listed private company were also arrested on charges of handing out the bribes.
Indian Finance Minister Pranab Mukherjee said in a statement yesterday he had asked all banks, financial institutions and insurance firms to look into their exposures to firms named by federal investigators in the case.
“The message is not good, both for the market also for the economy,” said D.H. Pai Panandiker, head of private think tank RPG Foundation in Delhi.
“All these things create a very bad image about the country and it’s kind of loss of faith in the system,” he said.
The scandals are unlikely to deter investors from India, one of the four key BRIC emerging markets in the world and a hot investment destination, analysts say.
“Anyone who has been an investor in India, has to be familiar with issues like these,” Vikas Pershad, Chief Executive of Veda Investments in Chicago.
“So, if someone is pulling out of India based on the recent events, he or she is really mistaken. The long-term growth story is intact.”
Investors are keen to tap into a country with a young and fast-urbanising population of 1.2 billion. Economic growth is forecast at 8.5 percent in 2010-11, and then between 9 and 10 percent every year after that, levels rivalled only by China. India was ranked 87th in Transparency International’s 2010 ranking of nations based on the perceived level of corruption. India lies behind rival China, which is in 78th place.
Shares in companies affected fell sharply since the scandal broke, dragging the Mumbai stock index lower <.BSESN>.
“The gratifications are huge, more than thousands of crores (hundreds of millions of dollars),” CBI Joint Director P. Kandaswamy, who is in charge of the probe in Mumbai, told reporters on Wednesday. CBI’s main spokesman in Delhi on Thursday said he could not confirm the size of the bribes.
The arrests are the culmination of a year-long investigation across five cities in India, the Delhi-based CBI said.
The Delhi government, however, sought to play down the scandal, saying it was an isolated incident.
“I do not think that the scale should be lost sight of. It’s very small as far as the banking system as a whole is concerned,” Montek Singh Ahluwalia, the powerful deputy of India’s Planning Commission, told NDTV Profit broadcaster.
“I think that our banking system is pretty well regulated. Both the RBI (Reserve Bank of India) and the (finance) ministry, I’m sure, are doing whatever is necessary to send the right signals,” he said. The CBI said those arrested included senior officials at state-run Central Bank of India <CBI.BO>, Punjab National Bank <PNBK.BO> and Bank of India <BOI.BO> — all major banks with operations across the country.
The executives in custody have yet to comment on the charges, but the companies involved have all denied any knowledge of wrongdoing and said they would review their internal regulations.
Life Insurance Corp of India (LIC), the country’s largest insurer and parent company of LIC Housing Finance, said it would appoint a new CEO for its housing financing unit.
The CBI said the accused had received bribes from listed private broker Money Matters Financial Services <MONE.BO>, which acted as a “mediator and facilitator” of corporate loans and other facilities.
Lending to developers, which LIC Housing and the other state-run banks in question are heavily involved, has grown considerably in recent years as part of the economic boom.
