New Delhi, March 9: Finance minister Arun Jaitley and the RBI's top brass are set to brainstorm on setting up a bad bank that will help handle India's huge backlog of bad loans as well as work on a plan to tackle the state-run banking sector's top 50 bad loans by taking over firms and selling assets.

Top officials said the pre-Holi meeting slated for Friday will work out ways of handling the top 50 bad loans or non-performing assets (NPA) - much of it in the steel, textile, power and infrastructure sectors - that the PSU banks are saddled with.

State-run banks reported a 56 per cent rise in bad loans in 2016. In all, total NPAs, including both public and private sector banks, rose to Rs 6.97 lakh crore in December 2016.

The RBI has been pressing state-run banks to take over assets and sell them to recover dues instead of negotiating with high profile debtors and agreeing to bail-outs.

North Block, which in the past has supported bail-outs, is now in favour of using laws recently passed to take over stressed assets.

"Bail-outs are not helping. Two rounds of bail-outs for the steel sector have not helped ... bankers should not give the kind of bail-out packages that Indian banks had given to failed businesses in the past. It's almost like a reward for being bad, or in some cases, fraudulent businesses," said a top finance ministry official.

Officials said post-demonetisation certain sectors were in a bad shape and expectations that a slight uptick in the GDP would help revive them was a "a fallacy".

"We will support more stringent action to recover, to take over and for asset sales or change in management."

Banks have already started citing various laws to take over stressed firms and are either working to change their management to revive the firm or to kick-start the process of asset sale.

A little more than a year back, then RBI governor Raghuram Rajan had scared banks and steel firms alike by demanding that many loans which banks were passing off as "standard" or normal loans should be re-assessed.

The review exercise forced banks to recognise many of these loans as bad debts or as stressed debts, requiring them to provision more money as security for such loans and for future lending to these firms or sectors.

The review confirmed that steel was one of the most stressed sectors and bankers openly admitted that the banking sector's low loan growth of 10.7 per cent in 2015-16 - the slowest in nearly two decades - was partly on account of lower lending to the heavily debt-laden sectors such steel.

Bad bank

At tomorrow's meeting, the two sides are also expected to take a call on plans for a bad bank, which seems now to have the support of both the finance ministry and RBI.

A note prepared by the economic division has recommended setting up a Public Sector Asset Rehabilitation Agency, charged with working out the largest and most complex cases.

While Rajan was opposed to the idea of a bad bank, the RBI under successor Urjit Patel has come out in its favour.