Indian state-run Punjab National Bank is working with the government and the Reserve Bank of India to try to settle a dispute over claims from counterparty banks in a $2 billion fraud by the end of March, a source with direct knowledge said.

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The government and central bank are keen to avoid a protracted dispute between publicly-owned lenders, and resolving the issue before the end of the month would give clarity on any fraud losses they would need to account for during the current quarter, said the source.

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 guarantees allegedly issued by rogue PNB staff.

In what has been dubbed the biggest fraud in India`s banking history, the banks had lent to two jewellery groups based on the guarantees and contend that PNB is 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.

Top PNB executives met senior finance ministry officials on Tuesday for discussions on the fraudulent letters of undertaking - a trade finance instrument used to perpetrate the fraud - said the source, adding PNB was likely to meet RBI officials on the issue this week.

"The government`s stand and the RBI`s stand should be in sync," the source said. "They will not like bickering among the banks because these are all owned by the government of India. Second is these are dues to overseas branches of Indian banks which are also regulated by foreign authorities. So, it will send them a wrong signal."

Bankers have said the fraud could lead to increased scrutiny of Indian banks operating overseas, and risks undermining foreign lenders` trust in India`s banking sector if not tackled swiftly.

Citing an unnamed banker, the Economic Times paper reported on Monday that Union Bank would have to treat PNB as a defaulter in its books, in what could create a "peculiar" situation.

The source told Reuters, however, that no bank was moving to declare PNB a defaulter, and that the bank would act as directed by the government and the RBI on the payment for the LoUs.

The source, who asked not to be named as the discussions were private, said PNB was hoping for a resolution before March 31, when the banks` fourth quarter ends.

If needed, PNB could make a conditional payment until any outstanding disputes were resolved, the source said.

A finance ministry spokesman said he was not aware of a meeting between the bank and the government.

An RBI spokesman and the heads of the five banks - PNB, Union Bank, UCO Bank, State Bank of India and Allahabad Bank - did not immediately respond to requests for comment.

PNB, which in December raised 50 billion rupees ($770 million) by selling shares to institutional investors and is also in the process of receiving nearly 55 billion rupees as part of a government cash injection programme, is adequately capitalised to take the load of any provisioning burden, the source said.

The fraudulent LoUs, 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.

($1 = 64.9750 Indian rupees)

(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)