"So banks must pay attention to the portfolio of non-performing assets, identify the wilful defaulters, take stern steps to recover loans from wilful defaulters even while helping others who are genuinely caught in business downturn to recover so that they can pay the loans in course of time.
One must be sympathetic, one must be stern," he said at the 78th foundation day of Indian Overseas Bank here.
"We cannot show laxity to wilful defaulters. It cannot be where loans will become non-performing, where borrowers prosper and lenders suffer," he said.
NPAs, or bad loans, of public sector banks rose 28.5 per cent to Rs 2.36 lakh crore in September last year from Rs 1.83 lakh crore in March 2013.
Total NPAs had gone up to Rs 1.37 lakh crore in March 2012 from Rs 94,121 crore in March 2011. The amount of NPAs in September 2013 has more than doubled since March 2011.
"I can understand the reasons for rise in NPAs. Every effort must be made to identify those who are wilful defaulters and those who are caught in the business cycle," P. Chidambaram said.
The Finance Minister said "humongous" capital is required in the future and the government is doing its part...banks have to find their own capital by retaining their profits for capital infusion.
He said banks infused about Rs 35,000 crore from their retained earnings in 2011-12 and Rs 37,936 crore in 2012-13.
P. Chidambaram said banks are yet to finalise the amount of retained profit they will infuse as additional capital.
"They will, after the year gets over, but I sincerely hope that a significant part of retained earnings can be infused by banks as capital," he said.
"The capital is to take care of a number of things. Firstly, banks are obliged to declare a dividend both to majority owner of the bank and the other shareholders," he said.
Noting that banks are compliant with global capital norms Basel II, he said, "We have to be compliant with Basel III norms. Every year until 2018 or so, Basel III norms will kick in and all our banks will have to be compliant with Basel III norms."
In the past five years and the current year, he said, the government has infused a significant amount of money in banks as its contribution to capital.
The government infused Rs 12,000 crore in 2011-12 and Rs 12,517 crore in 2012-13. The government has allocated Rs 14,000 crore for capital infusion in this financial year.
He further said that keeping in mind the "humongous amount" of capital required in the future, "all banks, all officers and all staff" should ensure that a significant amount of retained earnings should be used as capital, after paying taxes and declaring dividend.