Karnataka Government Halts Transactions with SBI and PNB: Implications and Reactions

The Karnataka government has taken a decisive step, instructing all state government departments, public sector units, boards, corporations, local bodies, and universities to immediately withdraw deposits from the State Bank of India (SBI) and Punjab National Bank (PNB). The order also bars any future business transactions with these institutions. The directive, issued on August 12, requires these entities to confirm compliance by September 20.

Background of the Decision

The circular, signed by PC Jaffer, Secretary of the Finance Department, outlined two key incidents prompting this directive. The first incident involves PNB’s Rajajinagar branch, where the Karnataka State Industrial Board had fixed deposits amounting to ₹25 crore. Upon maturity, PNB released only ₹13 crore, justifying the shortfall with ongoing court cases.

The second incident pertains to the former State Bank of Mysore, which merged with SBI in 2017. The Karnataka State Pollution Control Board had a fixed deposit of ₹10 crore. The state government accused the bank of adjusting the funds against loans taken by a private company based on forged documents before the deposit's maturity.

Official Reactions

An anonymous official from SBI expressed surprise over the government's decision, highlighting that the issue is still sub judice and the amount in question is relatively minor. The official noted that SBI has faced similar situations in the past, implying that the bank’s integrity and standard procedures should not be in doubt.

The Official Directive

The government’s directive clearly states that all departments and related entities must withdraw their deposits and investments from all branches of SBI and PNB. Furthermore, it explicitly prohibits making any future deposits or investments with these banks.

Impact on Banking Operations

This move by the Karnataka government may significantly impact the operational dynamics of SBI and PNB, particularly in terms of deposit mobilization and customer trust. It could also influence other state governments or institutions to reassess their banking relationships with these public sector banks.

SBI’s MCLR Hike

In a related financial development, SBI has increased the marginal cost of funds-based lending rate (MCLR) by 10 basis points across all tenors, effective from August 15, 2024. The one-year MCLR, which serves as a benchmark for corporate loan pricing, now stands at 8.95%, up from 8.85%. This adjustment reflects the broader trends in the banking sector concerning interest rates and funding costs.

Conclusion

The Karnataka government’s directive to sever ties with SBI and PNB marks a significant shift in the state’s financial dealings with major public sector banks. While the move aims to address specific grievances, it also raises broader questions about banking practices and the robustness of internal checks within these institutions. As the situation unfolds, both banks will need to navigate these challenges while maintaining their operational integrity and customer confidence.