Mumbai: The government will take steps to protect and empower state-run banks to take commercially prudent decisions as the banking system deals with a surge in bad debts, finance minister Arun Jaitley said on Monday.

After attending a review meeting of public sector banks (PSBs) and financial institutions, Jaitley said that the banks have made a number of suggestions to improve the recovery process, which the government will consider.

“In situations like these, banks should be empowered and consequently should be protected so that they can bring about commercially prudent settlements. The Indian Banks’ Association (IBA) will come out with specific suggestions and the government will consider them," he said.

“The aim is to protect bona fide decisions taken on the basis of commercial consideration. They also have to be empowered legally for debt recovery. We have moved amendments to the Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) and the Debt Recovery Tribunal Act. Along with the bankruptcy code and SDR (strategic debt restructuring), banks will be empowered legally to recover bad debts," he said.

Jaitley stressed that the government will fully support banks so they can, in turn, support growth.

He said that operationally, banks are sound.

“Overall, operational profit of banks was quite significant... in excess of 1.4 trillion. It is on account of the provisioning that overall the PSBs declared a net loss of 18,000 crore," the minister said.

Jaitley also said that the government will take a decision on the State Bank of India’s move to merge five of its subsidiaries and the Bharatiya Mahila Bank with itself.

“SBI’s proposal for merger of five subsidiaries is with the government. The government is in favour of consolidation as stated in the budget. A decision will be taken shortly," he said.

A stressed asset fund is one of the options the government is considering to help banks effectively deal with the bad loans on their books, Jaitley said without going into specific details.

“The bankers are very happy with the approvals on the stressed asset funds. It is essential for these companies to receive adequate working capital as well as equity capital, which we can solve with these funds," said the managing director and chief executive officer of a public sector bank, who was present at the meeting.

The banker declined to be identified as the discussion was confidential.

“Today’s IBA meeting was just a stock-taking exercise, to know what are the major issues with respect to stressed asset investment. Now, the IBA will sit and chalk out the modalities of the funds and this will go for government approval. There is no fixed timeline for this right now," the banker said.

A stressed asset fund with investment by banks and other investors would invest in stressed companies that are not able to service their debt. However, it remains to be seen how this will actually work, given that it just changes the nature of exposure banks have in these entities.

The government has been looking at a number of ways to address the non-performing assets problem.

Gross non-performing assets of 38 listed banks stood at 5.7 trillion as of 31 March, as lenders added a trillion rupees worth of bad loans in each of the quarters ended December 2015 and March 2016, according to data compiled by Capitaline, Mint reported on 30 May.