Problem solved. Steps taken to solve the problem:

1. check whether system in trusted mode (it was not)
2. check pam.conf for errors
3. check krb5.conf for errors
4. tail -f /usr/adm/syslog/syslog.log while attempt to login as regular user. Noticed error:

Dec 6 10:18:41 hpi-app3 sshd[17996]: [Clock skew too great in KDC reply] while getting initial credentials
Dec 6 10:18:41 hpi-app3 sshd[17996]: [Authentication failed] Password not valid
Dec 6 10:25:07 hpi-app3 sshd[17996]: error: PAM: Authentication failed

A clue. Check system time and it was off by 6 minutes.

7. ntpdate time.nist.gov
8. login as regular user:

Dec 6 10:25:13 hpi-app3 sshd[18049]: Accepted keyboard-interactive/pam for XXXX from xxx.xxx.xxx.xxx port 14153 ssh2

Now users are able to login.