Jaitley's disclosure on the move to check chit funds comes against the backdrop of several chit fund companies duping people of thousands of crores of rupees in several states.
The Minister referred to states like West Bengal, Odisha and Punjab in the context of states having powers to regulate chit funds on their own.
Earlier, members including Pappu Yadav of the RJD demanded strict measures to check the activities of chit funds.
After the Minister's reply, the house passed the Banking Regulation (Amendment) Bill, 2017, after rejecting a statutory resolution disapproving the Ordinance moved by a Congress member.
Under the bill, the central government may authorise the Reserve Bank of India to issue directions to any banking company to initiate insolvency in respect of a default under the provision of the Insolvency and Bankruptcy Code.
It also has provisions empowering the Reserve Bank of India to issue directions to banks for resolution of stressed assets.
"Many NPA cases could be fraud, as money taken was diverted. These are not routine NPAs. Criminal proceedings will be carried out and bank will start recovery procedure for such accounts," Jaitley said.
Speaking about the bill, Jaitley said that a company defaulting on loans cannot claim the right of equality in treatment as regards repaying the loans. He said defaulting companies cannot ask why it was being targeted when some other defaulters were being let free.
"No, that cannot be an argument. The system has the capacity to take only a certain number of cases. I'm sure they will take up more case," he said, referring to the 12 non-performing assets (NPAs) that have been identified for action by the National Company Law Tribunal (NCLT).
The Minister said that the loans, which have turned NPAs, were probably given at a time when the economy was in a "boom" period and they seemed good investment proposals.
"Nobody anticipated global crisis at that time... in last 3-4 years, prices of commodities collapsed. We're now trying find a solution for this difficult situation," he said.
"Our laws are obsolete and impeding the recovery process... therefore this mechanism was set up. It will select defaulter, direct banks to move expeditiously against the defaulter. NCLT will dispose of the case within 180 days. This process will recover the public money, so no one should have objection," he added.
Tracing the background of the NPAs problem of public sector banks (PSBs), Jaitley said that while private sector concentrates on retail lending for car and home loans, PSBs have been much ahead in industry and infrastructure lending for the overall growth of the economy and contribute to spending on social programmes.
The Minister also noted the multiple options available for resolution of stressed assets.
He said the options that the banks could offer the borrower were to exit from the business, bring in a partner for a joint venture, go for resolution through the asset reconstruction companies (ARC) or themselves take a haircut on the loan amount.
"At the end of the day, we need to change. They are national assets and we need to save the companies, have companies which are able to pay the banks," Jaitley said.
Referring to NPAs which amounted to more than 13 per cent of advances in 2001, the figure came down to less than 3 per cent in 2007-08, Jaitley said.
The sectors most responsible for the accumulated NPAs are steel, power, textiles and infrastructure, he added.
While the debt recovery tribunals (DRTs) set up in the 1990s that liberalised the system, Jaitley said, there were still problems where honest bankers had to decide on loans. They had to operate in the context of the Prevention of Corruption Act (PCA), in which an honest decision can go bad and they had to face the legal consequences.
"Some of our laws are obsolete... For instance, Section 13 of the PCA was drafted in 1988 prior to the liberalisation era to deal essentially with corruption. It can also be extended to decisions honestly taken but may look erroneous from another point of view."
"Now, we have a complete situation. The consortium of banks or individual bankers when they take decisions... so an oversight committee has been established which will overlook the settlements made and advise them on reasonable settlement," he said.
The Finance Minister said that a stalemate had developed over the whole NPAs, or bad loans, situation.
"These NPAs are continuing for last 5-7 years, a stalemate situation had been reached. This process had to be broken."