MUMBAI, Feb 16 (Reuters) - Stung by a $1.77 billion fraud, Punjab National Bank shares sank for a third day on Friday, with India's second largest state-run lender losing nearly a quarter of its market value since its shock disclosure earlier this week.
With investors fretting over the extent of its liability, The Economic Times newspaper reported that India's central bank had directed PNB to pay the entire amount to counterparties.
Morgan Stanley estimated on Thursday if PNB had to assume all the liability from the fraud it would need 80 billion rupees ($1.25 billion) in additional capital, which at the stock's current valuation would mean a 14 percent dilution.
Comments from PNB Chief Executive Sunil Mehta on Thursday had fallen short of saying the bank would assume any potential liabilities. Mehta said PNB would wait for the outcome of investigations, but added it would comply with any regulatory order.
Analysts said the fraud case was likely to cast a long shadow over the banking sector, particularly state-run lenders, several of which had also provided loans under the assumption they were being backed by PNB.
PNB has lost 90 billion Indian rupees ($1.41 billion), 23.4 percent, of its market value since its disclosure on Wednesday that a investigation was underway into suspected fraud, as a result of two junior officials at a branch in Mumbai steering unauthorized loans to customer accounts, including some firms e linked to Nirav Modi, a billionaire jeweler and diamond merchant.
Federal investigators have raided Nirav Modi's Mumbai home and offices, though the jeweler is outside the country and his whereabouts is unknown.
Modi launched an eponymous jewelry business branded NIRAV MODI, in capitals, with a chain of boutiques stretching from New York to London to Beijing.
As recently as last month, he was at the World Economic Forum in Davos. Indian media carried a group photograph with Prime Minister Narendra Modi in the foreground and Nirav Modi, who is no relation, grinning between rows of Indian business leaders behind him.
In noon trade on Friday, PNB's share was down 3 percent after sliding more than 18 percent in the previous two sessions.
The state-run banking sector index was down 1.54 percent in a flat Mumbai market.
Jayant Manglik, president of retail distribution at Religare Broking, said he was recommended investors be cautious about India's state banking sector.
"As a general rule, I would suggest staying away till there is clarity on this," he said.
PNB said in an announcement to the stock exchange on Thursday evening that it had suspended 10 employees during the investigation into the fraud, which Mehta said had gone on undetected for years.
PNB also said it had requested Hong Kong branches of two other Indian banks - Allahabad Bank and Axis Bank to provide it with documents and communications with the borrowers.
Companies related to Nirav Modi had used the fraudulent credit guarantees from PNB to get loans from overseas branches of Indian banks, including Allahabad and Axis, according to a previous police complaint from PNB.
Axis has said it sold down all its exposure based on the PNB guarantees, without giving further details. ($1 = 63.9050 Indian rupees) (Additional reporting by Patturaja Murugaboopathy; Editing by Simon Cameron-Moore)