By Miral Fahmy
* Bribery probe widens - paper * 8 executives arrested, charged with taking bribes for loans * Government says financial system not at risk By Devidutta Tripathy NEW DELHI, Nov 26 (Reuters) - India will widen its probe into a multi-million dollar bribery scandal in the banking sector that has tarnished the image of Asia's third-largest economy, with a newspaper reporting on Friday more banks and financial institutions would be investigated.
The scandal is putting to the test the ability of one of the world's fastest growing emerging economies to crackdown on corruption, especially as it comes a few days after Prime Minister Manmohan Singh had to defend his government in another graft scandal involving telecoms licences sold too cheaply.
Mint newspaper, citing an unnamed top official at the Central Bureau of Investigation (CBI), reported on Friday the federal agency would probe more banks and financial institutions in the bribery scandal that has so far led to the arrest of eight senior executives, mostly from state-run listed lenders.
The executives have been charged with taking bribed to facilitate large corporate loans, but media reports said the CBI and the Securities and Exchange Board of India (Sebi) were probing the possibility some of these loans were invested in the stock market rather than the projects they were intended for.
CBI officials were not immediately available to comment. The Economic Times newspaper, however, said at least nine companies were being probed for insider trading.
Shares in companies affected by the probe continued to fall on Friday, underperforming a slightly positive blue-chip Mumbai stock index . Shares in real estate firms have also fallen on fears that a cash crunch could delay or derail major development projects. Finance Minister Pranab Mukherjee has asked all banks, financial institutions and insurance firms to look into their exposures to firms named by federal investigators in the case.
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.
Analysts said they did not expect major impact on the overall Mumbai stock market as they expected the scandal to be driven by a few individuals and did not involve not widespread corruption.
The Indian bond and rupee market remained unaffected by the corruption scandal as traders did not view it as a risk to the banking system as a whole and as inflation, interest rates and fiscal conditions affected these markets more.
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 , accused of taking bribes to facilitate loans.
Three senior executives from a listed private company were also arrested on charges of handing out the bribes. [ID:nSGE6AO06E] The CBI said those arrested included senior officials at state-run Central Bank of India , Punjab National Bank and Bank of India -- all major banks with operations across the country. The CBI said the executives arrested had received bribes from listed private broker Money Matters Financial Services , which acted as a "mediator and facilitator" of corporate loans and other facilities. The executives in custody have yet to comment on the charges and are to remain in custody until Monday. The companies involved have all denied any knowledge of wrongdoing and said they would review their internal regulations. (Writing by Paul de Bendern; Editing by Miral Fahmy)