Finance Minister Arun Jaitley on Thursday put private sector debtors on notice saying they will have to pay their dues to banks or allow somebody else to step in and take control of the business.
Using the new bankruptcy law, the central bank has prodded banks to initiate insolvency proceedings against 12 large corporate defaulters to resolve Rs 2 lakh crore, or almost a fourth of the country's bad debt.
More defaulters are being notified for action.
Jaitley said the government was open to providing more capital to banks but cleaning up stressed loans was bigger priority.
"Through the bankruptcy law, I think this is the first time that debtors in India are being taken to task," he said at The Economist Summit in New Delhi.
Jaitley said bad loan resolution process will take time. "You can't have a surgical solution to this."
"A very easy solution to suggest is tax-payers must pay because the private sector has defaulted," he said, adding that bank recapitalisation, where the government puts in more capital in public sector banks to shore up their books, effectively amounted to that.
"Therefore, I think let's try and make the private sector pay for their debts or allow somebody else to step in," he said.
The government, he said, has already put in Rs 70,000 crore in banks as capital and is "open" to putting in more money.
There is also a possibility of some banks raising resources from markets, he said.
"We are also at an active stage going for consolidation. We don't need so many public sector banks. We need fewer but stronger banks," he said.
The Union Cabinet had last week decided to speed up mergers among 21 public sector banks (PSBs) to scale efficiencies and improve the quality of corporate governance.
However, the absent fresh capital infusions from the government, had cast doubts if such mergers would improve public-sector banks' weak capitalisation.
Jaitley said putting in more money at a later stage is a possibility.
The government owns majority stakes in 21 banks and merger of some of them is being considered for broader economic revival.
These lenders hold around 74 per cent of all deposits.
On interest rates, Jaitley said every finance minister wants interest rates to go down.
"That's been constantly the desire of everyone. But then at the end of the day, the regime and the system we have is that the finance ministry or North Block does not have the last word in this. Therefore we will live with the regime that we have," he said.
The Reserve Bank sets benchmark borrowing and repurchase rates, which are used as a reference by banks to decide on interest rates.
Jaitley also said the fallout of demonetisation was on predicted lines and the economy will benefit in medium and long term.
A day after the Reserve Bank said that almost all of the demonetised currency came back into the system, Jaitley said the fact that money got deposited in banks does not mean that all of it is legitimate money.
"It's nobody's case that black money has been completely eliminated after demonetisation," he said.
He said demonetisation, coupled with GST, will give a "significant boost" to direct tax revenues as many people have come under the tax net.
Although an overwhelming amount of money was deposited in banks, it is not a concern for the government as it is good for the economy that more money has come into the formal system.
"The fallout of demonetisation is on predicted lines ... the fact that money got deposited in banks doesn't make it legitimate money," he said, adding the country was ready for demonetisation even though there was political resistance.
The RBI on Wednesday said about 99 per cent of Rs 15.44 lakh crore demonetised currency came back into the system.
On the Goods and Services Tax (GST), Jaitley said its inflationary impact has been avoided and there is a scope of convergence of tax rates going forward.
The minister also said that consolidation of PSU banks is on cards as the country needs "fewer but stronger banks".