When a nationalised bank provides a loan, it checks the documents of the flat only to make sure that in case you do not pay the loan, then can they recover their loan amout from you. So, the bank's decision is based on the likelyhood of your not paying the loan amount and in that case if the bank sells the flat waht amount it may get for it.
So, you cannot buy a flat saying that since the bank has cleared the loan, then the builder must have met all legal conditions. Like you believed, the bank may also have beilieved that the builder would follow legal procedures.
Also, you must have been given a copy of th eoccupation certificate by the local municipal corporation before which you cannot occupy the flat. Has that been given?
In any case, the corporation will issue the notice to the builder who has to pay the penalty but he may try to recover the money from customers. You do not have to pay such penalty amounts for which you are not responsible. You may also approach the consumer court.
Please take proper legal advcie from a local expert.