In a leaked letter, the senior Liberal Democrat proposed turning the majority state-owned financial giant into a "British business bank".
The letter was sent to Prime Minister David Cameron and Deputy Prime Minister Nick Clegg on February 8.
Mr Cable wrote: "My suggestion is that we recognise that RBS will not return to the market in its current shape and use its time as ward of state to carve out of it a British business bank with a clean balance sheet and a mandate to expand lending rapidly to sound business."
Other elements of the letter, in which Mr Cable criticised the Government's lack of a "compelling vision" on industry, were leaked to the Financial Times last month. However, the remarks on RBS emerged in a full text obtained by the BBC.
The suggestion could cause friction with the Treasury - which is believed to support putting the bank back into private hands as quickly as possible.
Interviewed on BBC Radio 5 Live, Mr Cable insisted he had merely been "floating an option" in the letter.
"There is a real problem with funding SMEs," he said. "The particular initiative the Government is taking at the moment is the so-called credit easing initiative, the Chancellor is going to set out all the details of that in the Budget. But there are various other options and I was floating some in that letter."
He added: "When there are any specific proposals we will talk about them in more detail."
Shadow business secretary Chuka Umunna said Mr Cable's letter underlined "the extent to which the Department of Business lacks clout". He added: "It is becoming increasingly clear that David Cameron and George Osborne have become roadblocks to the modernisation and reform needed to create a more productive economy."