Tribals from the state's Kinnaur district are upset over the use of the term in the film, which takes a peek into the lives of people living near traffic signals in metros.
The people of the district maintain that under the constitution only they have the privilege of being called 'kinners'. They have demanded that the film be banned across the country.
The state government took the decision to ban the film late Wednesday.
A state government spokesman said that unless the objectionable word 'kinner' was removed, the ban will continue. Bhandarkar reportedly refused to oblige.
In 2001, the government banned a film titled "Kohram" as it had a villain called Virbhadra Singh, the name of the chief minister. The ban still continues.