Addressing a press conference here after reviewing the performance of public sector banks, the minister said the model code of conduct will not affect government functioning or restrain the RBI from awarding new bank licences.
"The biggest challenge facing the public sector banks is NPAs and asset quality...NPAs are high in large corporate sector as well as in the SSI and MSE sector," he said.
Without providing NPA data of PSU banks for this financial year, Chidambaram said it is "likely to be a little higher" over 2012-13, when NPAs stood at 3.84 per cent.
Stressing the importance of addressing NPAs, the minister said, "We have told them (banks) to focus on recovery and banks are focusing on recovery."
He said the efforts have yielded some results as PSU banks recovered Rs 18,933 crore of bad loans during the nine months through December 2013.
Bad loans of PSU banks rose 28.5 per cent to Rs 1.83 lakh crore in March 2013 over the preceding September.
To a query regarding the bad loans of United Bank of India, he said the issue would be discussed separately with RBI Governor Raghuram Rajan on Friday.
Kolkata-based United Bank posted a net loss of Rs 1,238 crore in the three months ended December, during which its gross NPAs surged to Rs 8,546 crore from Rs 2,964 crore at the end of March last year.
Chidambaram said United Bank had managed to recover Rs 1,200 crore in January and February.
Asked about the fate of new bank licenses in the wake of the Lok Sabha poll schedule announced by the Election Commission today, he said the process will not be affected due to the model code of conduct that came into effect.
"What's the code of conduct got to do (with) this The government and regulator are discharging their normal duties...the indication I have got from the RBI...(it) wishes to issue a few licences," he said.
Chidambaram also clarified that normal government functioning will not come to a halt following the announcement of elections and the Cabinet will continue to take decisions within the limitations imposed by the model code of conduct.
"Cabinet meetings will take place right up to the end. Cabinet meetings will take place. Cabinet will clear proposals based on decisions on policies announced earlier. Normal government functioning will take place.
"There are some restrictions placed by the Election Commission. There is a code of conduct. We will observe that. But nowhere does the Election Commission say government functioning should come to a halt," he said.
Chidambaram also said the Foreign Investment Promotion Board, which approves overseas investment proposals, will keep taking decisions.
The code bars the ruling party from taking any action that would disturb the "level-playing field" during elections.
Referring to the government's capital support to banks, Chidambaram they should focus on profitability.
"Government will provide additional capital into the banks...banks must also rely upon a part of their earnings, retain the earnings and infuse it as fresh capital. Therefore, it is important to address the issue of profitability of banks...they should be able to retain substantial part of the profit which can be infused as capital," he said.
Presently, he said all banks satisfy global capital adequacy norms (Basel III).
To a query on gold import curbs, the Finance Minister said the government will review customs duty on the metal after the final current account deficit (CAD) numbers for this financial year are out.
"We will revisit the import duty on gold only after the CAD figures become clear for the end of the year. Let's see what the CAD figures are," he said.
The government had imposed restrictions on gold imports to contain the CAD, which touched a record high of USD 88.2 billion in 2012-13.