India's Punjab National Bank (PNB) PNBK.NS will honour claims by peer banks who issued credit to billionaire jeweller Nirav Modi and his uncle Mehul Choksi against guarantees given by PNB, but the payments come with riders, the Economic Times (ET) reported.

PNB, the second-biggest Indian state-run lender, uncovered in January the alleged fraud in which certain bank officials were suspected of colluding with Modi and Choksi to issue fraudulent letters of undertaking (LoUs) for their firms to raise loans from overseas branches of mostly Indian banks.

Both Modi and Choksi have denied wrongdoing, and so have two key accused PNB employees in the case that has been dubbed as India's largest ever bank fraud.

ET, citing sources, said PNB has agreed to honour claims due by end-March but has mandated that peer banks will have to pay PNB if investigative authorities prove that there was malafide intent on the part of these banks. http://bit.ly/2Gn4uvB 

PNB did not immediately respond to requests for comment.

About 60 billion rupees ($924.14 million) is due to these banks by end of March, ET said.

State Bank of India SBI.NS and three other state-run banks, Union Bank of India UNBK.NS , UCO Bank UCBK.NS and Allahabad Bank ALBK.NS , are among lenders who have extended credit based on the LoUs issued by PNB that were later found to be fraudulent. ($1 = 64.9250 Indian rupees)

(Reporting by Krishna V Kurup in Bengaluru; Editing by Euan Rocha and Muralikumar Anantharaman) ((Krishna.VKurup@thomsonreuters.com; +91 80 6749 1310; Reuters Messaging: Krishna.VKurup.thomsonreuters.com@reuters.net;))