Pedestrians walk past a sign board of Punjab National Bank in New Delhi, India, Thursday, Feb. 15, 2018. State-owned Punjab National Bank has said in a statement that fraudulent transactions totaling $1.8 billion had been discovered in a Mumbai bank branch. Indian media outlets have linked the scam to jeweler Nirav Modi. (AP Photo/Altaf Qadri)
INTERNATIONAL - India’s federal police detained two employees of Punjab National Bank (PNB), the state-run lender that says it has been the victim of a $1.77billion (R20.54bn) fraud, in the first arrests of a fast-widening probe into the country’s biggest bank scam.

Gokulnath Shetty and Manoj Kharat are suspected of steering fraudulent loans to companies linked to billionaire jeweller Nirav Modi and entities tied to jewellery retailer Gitanjali, which is led by Modi’s uncle, Mehul Choksi.

India’s Income Tax department warned in an internal note that domestic banks could take a hit of more than $3bn from loans and corporate guarantees provided to Modi and Choksi.

The arrests, late on Friday, came two days after India’s second-largest state-run lender said it had been hit by massive fraud, sending its share price tumbling.

The accusations against the two relatively junior PNB officials were detailed in the lender’s disclosure, and also contained in a preliminary police report.

The Central Bureau of Investigation (CBI) also arrested a third person, Hemant Bhat, whom a source described as the “authorised signatory” of the companies tied to Nirav Modi.

All three appeared in a hot, packed courtroom in Mumbai on Saturday afternoon, and they were ordered to remain under police custody until March 3 to allow the CBI to continue its investigation. No charges have yet been laid.

Serious offence

“CBI must get fair chance to investigate this very serious offence, which has consequences for the country’s economy,” said judge SR Tamboli, as PNB employee Shetty shifted nervously and blinked frequently. The other two stood passively.

Family members of the accused present at the court defended them, saying they were innocent.

Kharat’s uncle said the PNB employee was “just following orders of superiors”, and added, “he wasn’t aware of what he is doing”.

A police source said six more PNB employees were “being examined” after the CBI conducted additional searches at the PNB’s branch in southern Mumbai where the alleged fraud took place.

Police sources say Modi, whose high-end jewellery has been worn by Hollywood stars, including Kate Winslet, and Choksi, left India last month and their whereabouts are unknown. Neither Modi nor Choksi have so far commented on the allegations.

Gitanjali has previously denied Choksi’s involvement in the fraud.