Loan scam dubbed one-off graft case but full review ordered (Roundup)

NEW DELHI - Even as policymakers Thursday sought to downplay the arrest of some top officers of banks and institutions in an alleged loan scam, Finance Minister Pranab Mukherjee ordered a full review of the financial system and remedial action.

The finance minister issued directions to all state-run banks, financial institutions and insurance companies to particularly look into their exposures to various companies mentioned by the Central Bureau of Investigation (CBI), that arrested the officials.

He directed that they should carry out an independent evaluation on the asset quality, documentation and compliance of other prudential requirements in the firms mentioned in the CBI application to court, a finance ministry statement said.

He also directed that they should ensure all procedures and due diligences, consistent with board-approved guidelines, have been adhered to while approving these loans by the competent authority.

The missive followed a review at his North Block here with officers of the Department of Financial Services of the situation arising out of the arrests Wednesday that involves a few banks and LIC Housing Finance.

At least eight top officers of some state-run banks and financial institutions were arrested by the probe agency Wednesday for allegedly accepting bribes to extend loans to corporate houses.

The agency said officials arrested included the chief executive of LIC Housing Finance, a general manager of the Central Bank of India and senior officials of Punjab National Bank and Bank of India.

Search and seizure operations were conducted in Mumbai, Delhi, Chennai, Jaipur, Kolkata and Jalandhar based on secret information received by the bureau. The scam has been going on for some time, a spokesperson for the agency said.

The agency also dispatched letters seeking explanation from some 15 firms against which it claims to have unearthed incriminating evidence, even as top policy-makers said these were but isolated cases of graft and not a scam that can shake the system.

“I do not think we should make too much of a particular incident, Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters here. Our banking system is well regulated. Both the finance ministry and the central bank will take appropriate action.

Banking Secretary R. Gopalan held a similar view and said the amount involved in these graft cases was insignificant, looking at the financial sector as a whole. It’s a case of individual greed not a systemic failure,” Gopalan said.

Officials at financial institutions also said the arrests did not reflect any systemic failure.

We are trying to have an internal enquiry into this matter. Our asset quality has not been impaired, said Life Insurance Corp of India chairman T.S. Vijayan. We will see if internal systems need tightening, whether risk management needs tightening.

But the stock markets were unrelenting.

The 30-share benchmark sensitive index (Sensex) of the Bombay Stock Exchange (BSE) Thursday fell 141.69 points, or 0.73 percent, while the drop in the index for banking stocks was twice as much at 1.42 percent.

The shares of Bank of India fell 5.85 percent and those of Punjab National Bank dropped 6.38 percent. Officials of both these banks were among those who were taken into custody Wednesday for questioning on the alleged graft cases.

The development saw the shares of LIC Housing Finance dive 18.32 percent at Rs.1,068.55, while that of the Central Bank of India plummeted 8.02 percent. Bank of India’s stock fell 5.88 percent.