INTERVIEW-India's PNB says internal probe into $2 bln fraud ongoing; more heads could roll

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NEW DELHI, April 11 (Reuters) - India's state-run Punjab National Bank is conducting an internal investigation into an alleged $2 billion fraud and more heads could roll, its chief executive said in an interview on Wednesday.

The country's second-biggest state lender, PNB disclosed in February that companies owned by two jewelers defrauded it by raising credit from overseas branches of other Indian banks, using illegal guarantees issued by rogue staff at a Mumbai PNB branch over several years.

Indian authorities have arrested 20 people, and a court has issued non-bailable warrants against jewelers Nirav Modi and his uncle Mehul Choksi. The duo have denied the allegations against them, and authorities say they both left the country before the fraud was uncovered.

"We are examining every aspect of it, and if we find others involved we will not spare them," said PNB CEO Sunil Mehta, in his first interview with a foreign news outlet since the fraud was uncovered.

PNB has so far suspended 21 officials and Mehta said the bank was carrying out an investigation to find out how the fraud - the biggest in Indian banking history - went unnoticed for more than half a decade.

Several experts have also questioned the failure of external auditors approved by India's central bank - known as statutory auditors - to detect the illegalities. These firms often only do top line reviews, not in-depth inspections.

"I don't blame them. They come only for a short period of time and they go and basically see data only on the CBS," said Mehta, referring to PNB's core banking software.

PNB has said the rogue bankers hid the fraud by issuing the guarantees via the SWIFT interbank messaging system, while not entering corresponding entries in the CBS.

The bank will soon finish integrating its CBS with SWIFT so this cannot happen again, Mehta said.

The banking regulator, the Reserve Bank of India, which has directed all banks to ensure this fix is implemented before the end of April, has not done any specific audit of PNB since the incident, Mehta said. (Reporting by Sanjeev Miglani and Krishna N. Das in NEW DELHI; Additional reporting by Devidutta Tripathy in MUMBAI Editing by Euan Rocha and Robin Pomeroy)