Mumbai/New Delhi: The Central Bureau of Investigation (CBI) plans to expand the scope of its probe into the corporate loan bribery scam that broke on Wednesday and scrutinize operations and books of banks and other financial institutions (FIs).

Investigations into the loans-for-bribes scam will be widened, said a top CBI official in Delhi on condition of anonymity. CBI’s economic intelligence unit in Mumbai started keeping a watch on real estate companies three months ago after wide price fluctuations in their stocks, the official said.

“It was found that some companies were investing the loan amount in their stocks to artificially raise share prices and then sell them off," he said. “Now we are investigating how much loan money these companies invested in their projects and how much they invested in the stock market. The entire financial transactions are being examined."

CBI has issued notices to these companies and is in the process of freezing their bank accounts as well. The agency is mainly targeting five real estate firms that received loans worth 1,000 crore with the help of Money Matters Financial Services Ltd, which allegedly facilitated corporate loans from state-owned banks and other FIs.

“The investigation now largely focuses on the misuse of loans and bribes paid to officials of the banks and LIC (Life Insurance Corp. of India)," the official said. CBI said on Wednesday that it had busted a racket in which key executives at large finance companies, including banks and LIC, sanctioned large corporate loans and disclosed confidential information in return for bribes.

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The agency arrested five executives from LIC, LIC Housing Finance Ltd (LIC HF), Bank of India (BoI), Central Bank of India and Punjab National Bank (PNB). CBI also arrested three top executives at Money Matters, a money market intermediary, for allegedly bribing executives.

The finance ministry issued a statement on Thursday asking all public sector banks, other FIs and insurance companies to look into their exposures to the various companies mentioned by CBI and carry out an independent evaluation on the asset quality, documentation and compliance with prudential requirements.

Finance minister Pranab Mukherjee reviewed the CBI case with officials. “The department of financial services (DFS) indicated during the review that an initial assessment has indicated that these are isolated instances of alleged illegal gratification. DFS also conveyed that as per information available with them, the asset quality in these cases have not been impaired," the ministry note said.

Mukherjee has instructed banks and FIs to take appropriate action against individuals involved in the scam. He said the boards of banks and FIs should carry out a fresh assessment of non-performing assets in these institutions and strengthen monitoring to ensure that advance action is taken to identify incipient sickness.

The finance minister also directed banks to ensure that all procedures and due diligence consistent with board-approved guidelines are being adhered to while approving loans.

In a press statement, BoI said, “The bank has noted that CBI has arrested certain bank executives in connection with loans extended by banks... This incident involves alleged misconduct of an individual. The bank has a proper structure for sanctioning loans, which is duly observed and the asset quality continues to be good."

The scam has drawn the attention of the income-tax (I-T) department. I-T officials told Mint the department would begin assessing tax implications on the money involved after investigations are concluded by CBI.

“There are no tax implications on the loans sanctioned by the financial institutions. The only tax implication is on the alleged bribes," said an I-T official, who didn’t want to be named.

Meanwhile, LIC’s south zone manager V.K. Sharma was appointed as the managing director and chief executive officer of LIC HF in place of R.R. Nair, the company’s arrested chief executive. Sharma, who joined LIC in 1981, will take control of LIC HF with immediate effect, said a senior LIC official on condition of anonymity. Nair has been removed from his position at LIC HF.

Shares that took a beating on Wednesday over concerns of systemic risk and doubts over the asset quality of FIs that are engaged in corporate lending extended their fall on Thursday.

Bankex, the banking index of the Bombay Stock Exchange, which had fallen 2.94% on Wednesday, shed 1.42% further to close at 13,286.43.

Among banking stocks, PNB lost 6.38% to ,183.75 and BoI fell 5.85% to 420.30. Shares of Central Bank of India, which had fallen 8.02% on Wednesday, gained 5.79% on Thursday to close at 209.35.

The realty index lost 5.4% to close at 2,877.35. Among realty stocks, DB Realty lost 9.99% to close at 235.25, Housing Development and Infrastructure Ltd fell 9.69% to close at 186.45, Orbit Corp. Ltd retreated 8.3% to close at .65. LIC HF, which fell 18.32% on Wednesday, fell a further 0.98% to close at 1,058.10.

The Sensex dropped 0.73% to 19,318.16 points.

Ashwin Ramarathinam in Mumbai also contributed to this story.