NEW DELHI / MUMBAI // 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 worth hundreds of millions of dollars.
The scandal is one of the biggest to hit India, potentially harming the image of Asia's third-largest economy as a destination for foreign investors, especially as it comes a few days after the prime minister, Manmohan Singh, had to defend his government in another scandal involving telecoms licences sold at rock-bottom prices.
The federal Central Bureau of Investigation (CBI) on Wednesday arrested five officials from state-run lending companies, including the chief executive of LIC Housing Finance, 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.
The Indian finance minister, Pranab Mukherjee, said 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, the head of RPG Foundation, a think tank in Delhi. "All these things create a very bad image about the country and it's kind of loss of faith in the system."
The scandals are unlikely to deter investors from India, one of the four Bric (Brazil, Russia, Indian and China) emerging markets and a hot investment destination, analysts say.
"Anyone who has been an investor in India, has to be familiar with issues like these," said Vikas Pershad, the 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 per cent in 2010-11, and then between 9 and 10 per cent 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, behind China, which is in 78th place.
Shares in the companies affected fell sharply since the scandal broke.
"The gratifications are huge, more than thousands of crores [hundreds of millions of dollars]," P Kandaswamy, the CBI joint director, told reporters on Wednesday.
The arrests are the culmination of a year-long investigation across five cities in India, the CBI said.
The government, however, sought to play down the scandal, saying it was an isolated incident.
"It is very small as the banking system as a whole is concerned. I think our system is pretty well regulated," said Montek Singh Ahluwalia, the powerful deputy of India's Planning Commission.
The CBI said those arrested included senior officials at state-run Central Bank of India, Punjab National Bank and Bank of India - major banks with operations across the country.
The executives in custody have yet to comment, but the companies involved have all denied any knowledge of wrongdoing and said they would review their internal regulations.
The CBI said the accused had received bribes from the listed private broker Money Matters Financial Services, 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.
This is the latest in a number of corruption scandals involving the Congress party in the past month and a half. India's government has also been jolted by controversy over licences and radio airwaves that a state auditor says were given out too cheaply, and often to companies not eligible.
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