After directing all its departments and public sector units to close their accounts at State Bank of India and Punjab National Bank a few days back, the Karnataka government has now kept its circular in abeyance for 15 days.

The two lenders said they are in talks with the state government for a ‘amicable resolution’ of the issue.

On 12 August, a government circular issued an order asking all state government departments, boards, corporations, public sector units and universities to withdraw all their deposits and investments in the SBI and the PNB and stop transacting any business with these institutions.

"After considering the banks' requests, the Honorable Chief Minister has directed officials of the Finance Department to keep the circular in abeyance for 15 days," the state government said in a release.

It said that putting the previous circular on hold "will allow the banks sufficient time to address the issues and redress the concerns of the government." The government is committed to ensuring transparency and accountability in all its dealings, said the statement.

"We will continue to monitor the situation and take appropriate action to protect the interests of all stakeholders," it added.

Explaining the circumstances, the state government said that based on the observations made by the Public Accounts Committee on 2 July and 6 August and the audit findings included in the Comptroller and Auditor General's report, the government has taken a decision to issue the circular on 12 August, directing all departments to withdraw their deposits and restrict further deposits in all branches of SBI and PNB.

This action was taken in response to the alleged fraud in the bank branches, which resulted in the non-repayment of fixed deposits made by the Karnataka State Pollution Control Board (KSPCB) and the Karnataka Industrial Area Development Board (KIADB), the statement said.

Despite prolonged correspondence and meetings, these issues remained unresolved since 2012-13, the government said. It added that on 16 August both banks submitted written representations to the government, requesting a 15-day period to resolve the matter.

The same day, senior bank officials met with higher officials of the Finance Department and reiterated their request, PTI reported.

According to the previous circular, Rs 12 crore belonging to the Karnataka Industrial Area Development Board (KIADB) and Rs 10 crore of the KSPCB were blocked by PNB and SBI respectively for many years owing to scams in these two banks.

The KIADB had started a fixed deposit of Rs 25 crore in PNB’s Rajajinagar branch, Bengaluru, on 14 September 2011. However, after the term of the deposit ended, PNB allegedly released only Rs 13 crore, citing fraud by bank officials. The matter is now sub judice.

In case of SBI, the Karnataka State Pollution Control Board had a fixed deposit of Rs 10 crore at the erstwhile State Bank of Mysore (merged with SBI in 2017). According to the state government, the amount was adjusted to the loans taken by a private company using forged documents. Attempts to recover the amount are said to have suffered the same fate as that of the fixed deposit in PNB.