Finance Minister Pranab Mukherjee on Thursday directed all public sector banks,financial institutions and insurance companies to review their exposure to companies mentioned in a CBI investigation,which unearthed a major housing finance racket involving officials of Bank of India,Central Bank of India,Punjab National Bank,LIC,LIC Housing Finance and non-banking finance company Money Matters. Analysts said the unearthing of the racket would put downward pressure on banking sector stocks and adversely affect sentiment in the stock market. However,bankers maintained that these were isolated cases and that lending to the real estate sector would not be curtailed due to this. The CBI on Wednesday arrested eight persons and alleged that officers in the top- and middle-level management of banks and institutions were receiving illegal gratification from private NBFC Money Matters,which was acting as a mediator and facilitator for corporate loans and other facilities from financial institutions. The beneficiaries include DB Realty,HCCs subsidiary Lavasa,Pashmina Ltd,Mantri Realty,Sigrun Ltd,Entertainment World,Indore City Treasures,Ashapura Mine-chem,BGR Energy,OPG Group,Adani,JP Hydro,JSW Power,Ralligare,Pantaloon,Adalite and MTECH,said a court application filed by CBI. In a meeting held on Thursday,the department of financial services in the finance ministry,which deals with banks,insurance companies and FIs,indicated that these are isolated instances of alleged illegal gratification and that the asset quality in these cases has not been impaired. The housing finance racket continued to hit the financial and real estate company stocks for the second day,with shares plunging as much as 10% at the Bombay Stock Exchange on Thursday. LIC,whose housing finance entity chief was arrested,and Bank of India,whose senior official was also nabbed in the scam,said they have initiated an internal inquiry into the matter. The institutions maintained their exposure to the realty sector was small and loans were performing well. Mukherjee directed banks and financial institutions to carry out an independent evaluation on the asset quality,documentation and compliance of other prudential requirements in the companies mentioned by CBI. Banks and financial institutions should be instructed to take appropriate action against these individuals as per procedure, according to a statement issued by the finance ministry after the review meeting. Life Insurance Corporation chairman TS Vijayan said on Thursday that LIC would order a probe into involvement of its officials in the loan racket but there was no systemic risk. The insurer would investigate each of LICHF assets and would check if internal systems must be tightened more. He added LIC would take disciplinary action against LICHF CEO Ramchandran Nair. SBI chairman OP Bhatt said the issue would not impact disbursal of loans to the real estate sector. Citi Investment Research & Analysis on Thursday warned that the loan scam may lead to some derating of the entire public sector banking sector,especially of those named in the scandal. The brokerage expects large private banks with strong deposit franchise to be relative beneficiaries in terms of valuations. Citi said it continues to prefer HDFC Bank,Axis Bank,ICICI Bank and State Bank of India. Central Bank has Rs 7,000-8,000 crore exposure to real estate sector while Punjab National Bank has Rs 9,000 crore. UBS on Thursday cut its rating on Indias LIC Housing Finance to sell from neutral. It also downgraded Punjab National Bank to neutral from buy and Bank of India to sell from neutral. Everything that could go wrong appears to be going wrong, Morgan Stanley analysts said in a note. These events will cause the volatility in Indian equities to intensify. ICICI Securities advised investors not to look at buying these stocks at lower levels till further clarity emerges. Negative cues pulled down stocks of major lenders,including PNB which tanked 6.38%,Bank of India down 5.85%,Canara Bank down 3.35%,LIC Housing Finance 0.98%,dragging the BSE banking index down by 1.42%. Other scrips like SBI ended down 0.98% and ICICI Bank 0.70%. Among the real estate companies,DLF lost 4.13%,DB Realty was down 9.99%,Indiabulls Real Estate down 5.22%,Unitech down 6.04%,HDIL down 9.69% ,Jaiprakash Associates down 5.19%. The BSE realty index plummeted 5.40%.Money Matters tumbled by 20% on Thursday after falling 20% on Wednesday. Minister of state for finance Namo Narain Meena said on Thursday the housing loan racket was not a widespread scam and would not hit markets or the banking sector. The income tax department also said it would look into tax issues in the case. Bankers say small firms like Money Matters,which has allegedly been acting as middleman between real estate companies,and banks and housing finance companies try to get highly unsecured loans from these institutions by luring or bribing them on behalf of corporate houses. These are normally loans that have either been rated negative by credit rating agencies or have not been rated at all in fear of negative rating. These kind of firms try to persuade the bankers through fair and unfair means to get this kind of unsecured loans. This is very unfortunate. Still,this can be taken as one of such cases only, said Corporation Bank CMD Ramnath Pradeep.This kind of thing where bankers take bribe to sanction loans can happen when the people in the industry get greedy,but to say that such practices are rampant in the banking industry will be matter of exaggeration, said Cherian K Verghese,former CMD,Union Bank of India. We need to have more checks and balances so as to avoid situation like this in future. More important is that bankers should have direct contact with the client. There is no need of having a facilitator or mediator while finalising the loans, Verghese added.
