Karnataka Government’s Directive to Cease Transactions with SBI and PNB

Karnataka Government Takes Action Against Major Public Sector Banks Following Allegations of Misappropriation

Karnataka PNB SBI News: The Karnataka Government has recently instructed all its departments, public sector units (PSUs), universities, and subordinate organizations to halt all financial transactions with the State Bank of India (SBI) and Punjab National Bank (PNB). This decision follows significant concerns regarding the inability to recover funds deposited by state entities, as reported by The Economic Times.

Background of the Directive

The Finance Department of Karnataka, under the supervision of Chief Minister Siddaramaiah, issued a circular highlighting unresolved issues with both SBI and PNB. The Karnataka Industrial Areas Development Board (KIADB) and the Karnataka State Pollution Control Board (KSPCB) reported difficulties in recovering fixed deposits from these banks, despite several rounds of negotiations.

Punjab National Bank (PNB) Incident: In 2011, the Karnataka Industrial Areas Development Board (KIADB) deposited ₹25 crore with PNB’s Rajajinagar branch. However, upon maturity, PNB returned only ₹13 crore. Despite multiple attempts over the past decade to recover the remaining amount, the efforts have been unsuccessful. This has led to a significant loss for the KIADB and has raised concerns about the bank’s handling of large deposits.

State Bank of India (SBI) Incident: The Karnataka State Pollution Control Board (KSPCB) had a ₹10 crore fixed deposit with the former State Bank of Mysore, now part of SBI. This deposit was misappropriated using forged documents to settle loans for a private company. Attempts to recover the funds have been equally unsuccessful, leading to serious concerns over the bank’s security and governance.

Both incidents have prompted the Karnataka government to instruct its departments, public sector units, and universities to cease transactions with SBI and PNB. The circular, dated August 12, 2024, and signed by PC Jaffer, Secretary (Budget & Resources) of the Finance Department, requires compliance by September 20, 2024. Departments are directed to submit closure reports and detailed accounts of all deposits and investments. The issue is currently sub judice, with ongoing discussions between the banks and the Karnataka government for an amicable resolution.

Audit and Legal Implications

The government’s action follows objections raised by audit authorities and the legislature’s public accounts committees. The issue is now sub judice, meaning it is under judicial consideration and cannot be commented on extensively.

SBI and PNB Banks’ Statements

Both SBI and PNB have expressed their commitment to resolving the issue. PNB stated that it is in discussions with the Karnataka government and aims for an amicable resolution. Similarly, SBI confirmed ongoing talks with the state government, emphasizing the legal nature of the case, which limits their ability to provide specific comments at this time.

How this Decision Impacts the Banks

The Karnataka government’s decision to cease transactions with Punjab National Bank (PNB) and State Bank of India (SBI) could have significant repercussions for both banks. Here are some potential consequences:

• Reputation Damage: The allegations of fund misappropriation could damage the reputations of PNB and SBI, leading to a loss of trust among other clients and stakeholders.
• Financial Impact: The immediate withdrawal of government deposits and the halt in future transactions could impact the banks’ liquidity and deposit base, particularly in Karnataka.
• Legal and Regulatory Scrutiny: The involvement of legal proceedings might result in increased scrutiny from regulatory bodies, possibly leading to penalties or further legal actions.
• Operational Challenges: The banks may face operational challenges in recovering the misappropriated funds and addressing the legal disputes, which could divert resources and attention from other business activities.
• Impact on Business Relationships: Other state governments or public sector entities may reconsider their banking relationships with PNB and SBI, potentially leading to a broader loss of business.
• Investor Confidence: Investors might react negatively to the news, leading to potential fluctuations in the stock prices of PNB and SBI, especially if the situation is perceived to be mishandled.

Overall, while the immediate financial impact may be contained, the long-term consequences could be more severe if the banks are unable to resolve these issues swiftly and transparently.

The Karnataka Government’s directive reflects a strong stance against what it perceives as mishandling of public funds by major public sector banks. As the situation evolves, the outcome of the ongoing legal proceedings and negotiations will be crucial in determining the future relationship between the state government and these banking institutions.