"Cases of fraud have been detected in many banks. There is no difference in fraud and wilful default as both are intentional in nature," Financial Services Secretary Gurdial Singh Sandhu told PTI.
"So banks have been asked to declare such cases as wilful default and appropriate legal action should be initiated by banks," he said.
Cases of fraud include providing wrong information, submission of fictitious documents and so on.
Sandhu said banks have to deal with all such cases firmly so that non-performing assets could be brought down.
"Banks have to make all out efforts for NPA recovery and reducing level of NPA and cost of funds. Government would be working very closely with banks," he added.
Non-Performing Assets or bad loans of state-owned banks rose by 28.5% from Rs 1.83 lakh crore in March, 2013 to Rs 2.36 lakh crore in September last year.
Banks recovered Rs 18,933 crore worth of bad loans during the April-December period. They have been monitoring their top 30 bad loan accounts for quite some time now.
PSU banks accounted for the disproportionate share in this increase in NPAs, while the new private sector banks managed to lower their NPA ratio.
Last month, Finance Minister P Chidambaram had said "the biggest challenge facing the public sector banks is NPAs and asset quality... NPAs are high in large corporate sector as well as in the SSI and MSE sector".
Chidambaram had said NPAs for 2013-14 are "likely to be a little higher" over 2012-13, when they stood at 3.84%.
Stressing the importance of addressing NPAs, the minister had said: "We have told them (banks) to focus on recovery and banks are focusing on recovery.