By Devidutta Tripathy
MUMBAI (Reuters) - Indian state-run Punjab National Bank has agreed to pay 65 billion rupees ($997.4 million) to counterparty banks, honouring an initial tranche of claims over a massive fraud case and ending uncertainty around repayments in the banking sector.
In what has been dubbed as the biggest fraud in India's banking history, two jeweller groups have been accused of defrauding banks by raising loans from overseas branches of Indian lenders using nearly $2 billion of fraudulent guarantees issued by rogue PNB staff at a Mumbai branch.
PNB's board on Wednesday approved payment over the fraudulent guarantees due by end-March to seven banks. It will also honour any subsequent maturing guarantees when they are due, the bank said.
"This measure will ensure that India's banking system at large has the least possible disruption owing to the unfortunate fraud and banking operations will continue to function smoothly," PNB said in a statement.
At least four other state-run banks - State Bank of India, Union Bank of India, UCO Bank and Allahabad Bank - have disclosed exposures that range between $212 million and $412 million to fraudulent PNB guarantees.
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The counterparty banks had said PNB was liable to make good any losses on those loans. PNB has previously said it was ready to honour "bona fide" commitments, but it has also said counterparty banks were partly at fault for not making adequate checks when sanctioning the loans.
The banks were in talks over the claims and had also involved the government and the central bank as they sought to settle the dispute before the end of their fourth quarter and financial year on March 31.
A source with direct knowledge of the talks had told Reuters on Tuesday that PNB was moving to quickly resolve the dispute by the end of the month.
Even if it had to make full payment to counterparty banks, PNB was adequately capitalised to take the load, the source had said.
The fraudulent guarantees, valid for one year and issued on behalf of companies owned by jewellers Nirav Modi and Mehul Choksi, are due between January and April this year, according to police and court documents.
Both Modi and Choksi are out of India and have denied any wrongdoing. Authorities have so far arrested 20 people including PNB executives in the case.
($1 = 65.1700 Indian rupees)
(Reporting by Devidutta Tripathy; Editing by Alex Richardson)