The ministry also assured the banks and other financial institutions that there will be no government interference in transfer and postings within the organisations.
"The banks/FIs should take all commercial decisions in the best interest of the organisation without fear or favour," the ministry said in communication to chiefs of all state-run banks, FIs or financial institutions and insurance companies.
It further said that no decision should be taken due to any "extraneous consideration such as the influence or the position that the borrower is holding".
The instructions follow soon after Mr Modi said on Saturday at a bankers' retreat that banks were free to take decisions and they would never get any "call from Prime Minister's Office (PMO)".
The Prime Minister had said banks would be run professionally and there would be no interference.
The Finance Ministry communication also said that banks should take all commercial decisions "objectively, based on facts of the case".
"...if any complaint comes to the (Financial Services) Department from anybody informing that exceptions were made in certain cases without any objective basis, and in order to favour somebody, the person taking such decision would be accountable," it said.
The ministry has also asked these banks and FIs to have a robust grievance redressal mechanism for borrowers, depositors and the staff.
It asked each of them to draw a well laid out transfer and posting rules and follow them strictly.
"No exception should be made in such rules at the behest of any recommendation given by anyone including anybody from the Ministry of Finance.
"If, for genuine reason any exception to the rule is made, it should be done only by CMD by giving proper reasons," the communication said.