* NSE index down 1.3 pct, BSE index 1 pct lower
* PNB slumps for fourth day
* Bhushan Steel rises by daily limit
By Tanvi Mehta
Feb 19 (Reuters) - Indian shares declined for a second straight session on Monday as state-run lenders fell further amid continued worries about the fallout from a $1.77 billion fraud reported by Punjab National Bank last week.
PNB shares fell as much as 9.6 percent to their lowest since January 2017 after federal police detained on Saturday two bank employees suspected of steering the fraudulent loans and sealed on Monday the lender’s Mumbai branch at the heart of the case.
Meanwhile, worries about the impact from guarantees to PNB loans hit other lenders. Reuters reported on Saturday that Indian banks could take a hit of more than $3 billion from loans and corporate guarantees provided to diamond companies, according to a tax department note.
“It could continue to impact for some more time. The issue of its impact on the entire PSU banking system will keep markets edgy,” said Siddhartha Khemka, head of retail research, Motilal Oswal Securities.
The broader NSE index was down 1.3 percent at 10,316.20 as of 0642 GMT, while the benchmark BSE index was 1 percent lower at 33,670.65.
The Nifty PSU bank index dropped as much as 3.2 percent to its lowest since October 2017.
UCO Bank slumped as much as 12.3 percent to its lowest since April 2009 after the state-run lender said it had $411.82 million in exposure to fraudulent transactions carried out at PNB.
City Union Bank declined as much as 5.3 percent after its chief executive said “cyber criminals” hacked the bank’s systems and transferred nearly $2 million via unauthorised remittances to lenders overseas.
The Nifty IT index dropped as much as 0.9 percent on profit-taking, after having gained over 6 percent this year as of Friday’s close.
Shares of air carriers rose after the aviation regulator said passengers carried by domestic airlines rose nearly 20 percent to 11.5 million in January.
Bhushan Steel Ltd surged by its daily limit of 19.9 percent after the Economic Times newspaper reported that Tata Steel Ltd emerged as the front runner to buy the debt-laden firm. Tata Steel shares tumbled 6.7 percent. (Reporting by Tanvi Mehta in Bengaluru; Editing by Subhranshu Sahu)