MUMBAI (Reuters) - India's Punjab National Bank (PNB)PNBK.NS has detected fraudulent transactions worth $1.77 billion at a single Mumbai branch in a case that could affect more banks and raise fresh questions about lending procedures at Indian banks mired in soured debt.

FILE PHOTO: The logo of Punjab National Bank is seen outside of a branch of the bank in the City of London financial district in London September 4, 2017. REUTERS/Toby Melville/File Photo

PNB, India’s second-largest state-run lender with assets of $120 billion, said in a regulatory filing that the fraud benefited “a few select account holders” and that it has reported the matter to law enforcement agencies.

Indian federal agents last week said they were investigating a billionaire jeweler, Nirav Modi, and others over accusations that they defrauded PNB of $44 million.

An official with the Central Bureau of Investigation (CBI) told Reuters on condition of anonymity that the cases were related.

Modi, who has not commented on the federal case so far, could not be reached for comment on Wednesday. His flagship Firestar Diamond has said it had no involvement in the case.

PNB said that other banks appeared to have lent money to customers abroad based on the fraudulent transactions. It did not name the banks or the customers.

Indian banks, including PNB, have been stung by a surge in bad loans in the past four years, choking lending growth vital to accelerate the pace of expansion in Asia’s third-largest economy. The government recently announced a $14 billion bailout for state banks that account for most of the $147 billion of soured loans.

Shares in PNB, the fourth-biggest among all Indian banks by assets, closed almost 10 percent down on Wednesday.

‘LETTERS OF UNDERTAKING’

PNB first notified the CBI of its discovery late last month and subsequently issued a “caution notice” to warn other lenders about the alleged fraud. PNB has said that two junior officials at the Mumbai branch had issued illegal “letters of undertaking”.

Letters of undertaking (LoUs) are typically issued by a bank giving some sort of a guarantee on behalf of a company. Other lenders give credit based on the letter of undertaking issued by a bank.

PNB did not name the other banks it said had advanced money to customers based on the fraudulent transactions. BTVI news station cited unnamed sources saying that Axis Bank AXBK.NS had discounted 40 billion rupees ($624.4 million) worth of fraudulent LoUs from PNB and that it had sold a majority of this to State Bank of India SBI.NS.

Two other state-run banks Union Bank UNBK.NS and Allahabad Bank ALBK.NS have each discounted 13 billion rupees worth of PNB LoUs, the television channel said. None of the banks responded to requests for comment.

PNB’s caution notice dated Feb. 12 and addressed to chief executives of 30 banks -- a copy of which has been seen by Reuters -- said officials at overseas branches of other Indian banks who extended loans based on the fraudulent letters of undertaking also “overlooked” some central bank rules.