New Delhi, Feb 19 (Reuters): India's Punjab National Bank (PNB), which is at the centre of a probe into a $1.77 billion loan fraud scam, will need to honour the "bonafide" transactions that have occurred through the bank's platform, a finance ministry official said on Monday.

In the case, diamond billionaire Nirav Modi and others are accused of colluding with bank employees to fraudulently obtain advances for payments to overseas business suppliers, in the country's biggest ever bank scam.

Some banks have said that PNB was liable to make good on the credit extended, although PNB maintains other lenders share some of the blame as they should have more closely examined the requests for credit. Analysts have warned, however, that PNB may be left on the hook.

Rajiv Kumar, India's financial services secretary, said the bank "will have to own responsibility for bonafide transactions."

Morgan Stanley estimated on Thursday if PNB had to assume all the liability from the fraud it would need 80 billion rupees ($1.25 billion) in additional capital, which at the stock's current valuation would mean a 14 percent dilution.

Kumar also said the ministry had written to all banks to take effective steps to avoid a repeat of a PNB-like fraud. The Reserve Bank of India will also take all the required steps in the fraud case, Kumar said.

"Our responsibility is to ensure that fire alarms are installed and are in working condition. We can't stop every fire," Kumar told Reuters.