Bond scam costs Indian banks $18.5m

Sinha: insists the alleged fraud is smaller than had been feared

By Theo Leggett BBC World Business Report

India's finance minister, Yaswant Sinha, is rejecting claims a multi-million dollar scam involving government bonds could have been prevented by tighter regulation.

Senior figures at two brokerage firms have been arrested on suspicion of swindling money from co-operative banks.

The brokers are accused of borrowing the money from the co-operative banks with assurances that it would be invested in government securities - traditionally one of the safest investments possible.

Instead it is alleged that the cash disappeared.

It had been claimed that four of India's 2,000 co-operative banks lost up to $100m in the alleged scam.

Mr Sinha is also insisting that the size of the alleged fraud is much smaller than had been feared, at $18.5 m.

Arrests

The founder of the Home Trade online brokerage, Sanjay Agarwal, was arrested on Saturday.

On Wednesday, the owner of India's Gilt Edge brokerage, Ketan Sheth, was also detained.

Three other companies are under investigation.

The scandal has already led the Reserve Bank of India to call for the dismissal of the managements of five co-operative banks.

However, it is thought the financial impact of the affair on India's wider banking industry will be limited.

The co-operative sector holds less than 5% of the reserves invested in India's banks as a whole, which total more than $200bn.

Many were set up in the period following independence from Britain in 1947, with prominent citizens coming together to set up banks that would offer credit to people living in rural areas.