$1.8 Billion in India Bank Fraud Raises Fears of Ripple Effects

“Trying to do things on the cheap was always doomed for failure,” he said. “They have to bite the bullet and take on bureaucrats and the bank employee unions and actually fix banks’ governance or India will struggle to maintain its growth projections.”

Mr. Sharma, like other analysts, says the government in New Delhi will need to privatize a number of lenders or shut them down. State-owned banks are seen as bloated, with senior positions filled through political appointments rather than merit. Loans, meanwhile, are often doled out to politically important projects or voting regions before being given to financially worthy ones.

Punjab National Bank said on Wednesday it had “detected some fraudulent and unauthorized transactions” at one of its Mumbai branches. “Based on these transaction, other banks appear to have advanced money to these customers abroad,” it said in a statement posted on the website of the city’s stock exchange.

Fears that India’s wider banking sector may be exposed to Punjab National Bank’s troubles left investors panicked, driving shares in several other lenders to also close lower on Wednesday.

The central bank, the Reserve Bank of India, did not immediately respond to emailed requests for comment.

But government officials played down the extent of Punjab National Bank’s woes and the potential for ripple effects on the sector.

“I don’t think this is out of control or too big a worry at this point,” Lok Rajan, joint secretary at the Department of Financial Services, told Indian reporters on Wednesday. “That is my broad sense.”

Analysts were skeptical of Mr. Rajan’s upbeat claims, however.

“This is a very big crisis,” Mr. Sharma said, “but it’s been so slow moving that people haven’t been concerned about it over the last few years.”

“Both the government and the central bank have been slow to fix the bad loans problem,” he added, noting that the government has had trouble getting lenders to come clean about the extent of bad loans in their portfolios.

“Even if bad loans are just under 10 percent in some public sector banks — which is the best we can hope for — that’s still worrying,” he said.

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