UPDATE 2-India's PNB uncovers more fraud at troubled Mumbai branch

* PNB discloses another fraud, of $1.4 million, at Mumbai branch

* Latest fraud allegedly involves Chandri Paper

* Investigation goes on of separate $2 billion fraud at branch

* State-run bank execs vow to strengthen systems (Repeats to additional subscribers)

MUMBAI/NEW DELHI, March 15 (Reuters) - India's Punjab National Bank (PNB) has uncovered another credit-guarantee fraud within the Mumbai branch at the centre of a similar scam worth over $2 billion, according to a complaint filed with the federal police.

The alleged embezzlement of around 91 million rupees ($1.40 million) involved executives of a company called Chandri Paper and Allied Products, according to the complaint filed by PNB with the Central Bureau of Investigation (CBI).

The newly uncovered scam raises fresh doubts about whether more such cases involving fraudulent guarantees lurk on the books of PNB, the second biggest state-run lender, or other government-owned Indian banks.

The new case came to light after India's central bank ordered all state-run lenders to provide it with details of all letters of undertaking - a form of credit guarantee used to orchestrate the alleged $2 billion fraud - issued by them in the past several years.

Separately, top executives from state-run lenders, including market leader State Bank of India, on Thursday sought to reassure investors and vowed to strengthen systems and practices at the banks that account for two-thirds of India's banking assets.


Each bank has already scanned their credit-guarantee transactions involving letters of undertaking and found all to be genuine except those already reported, the group of bankers told a news conference in New Delhi.

The bankers' comments come a day after a strongly worded speech by the Indian central bank chief Urjit Patel, who said the Reserve Bank of India did not have enough authority over the government-owned banks, which are also regulated by the government.

In its latest regulatory clampdown after the PNB fraud, the RBI, which has faced criticism for not being able to police the banks, this week barred banks from issuing letters of undertaking.

In what has been called India's biggest banking fraud, PNB has accused jeweller groups headed by diamond tycoon Nirav Modi and his uncle Mehul Choksi of colluding with bank employees to get fraudulent letters of undertaking, which helped them raise credit of about $2 billion from overseas branches of Indian banks. Through their lawyers, Modi and Choksi have denied any wrongdoing.


In the latest case that came to light on Thursday, PNB told the CBI that two officials at its Brady House branch in Mumbai "entered into a criminal conspiracy" with directors of Chandri Paper in April 2017 to fraudulently issue two letter of undertaking for the company to raise the money.

According to the complaint, the same set of bank officials were allegedly involved in the cases involving both the jewellers and Chandri Paper. The two officials - one of them already retired - were arrested last month. They have denied any wrongdoing in the case involving the jewellers.

A PNB spokesman had no immediate comment on the Chandri paper case. Chandri Paper could not immediately be reached for comment.

PNB shares closed 0.8 percent down in a Mumbai market that fell 0.5 percent.

(Reporting by Devidutta Tripathy, Neha Dasgupta, Abhirup Roy and Krishna N. Das; editing by Larry King)