Bob Katter has threatened to support Labor’s plan to extend parliament unless the government makes “substantial” concessions on banking reform such as a public body to lower interest rates for cattle farmers.

Scott Morrison confirmed on Wednesday he was “working with Bob Katter … on the reconstruction of the cattle industry in northern Australia” as the independent MP laid out an ambitious series of demands including to abolish two key financial regulators and reduce debt for cattle farmers.

Katter is one of the key crossbench votes Labor needs to recall parliament for two extra sitting weeks in March to discuss banking reforms. But Katter has a $200m commitment for water infrastructure from the Morrison government which could be at risk if he joins the insurrection.

The threat to the government receded on Wednesday when Andrew Wilkie – who had previously supported an extension of parliament – said that “so few” extra sitting days would “not allow time to properly prepare, scrutinise and debate the necessary bills in both houses of parliament”.

Wilkie told Guardian Australia the change of heart came after a treasury briefing and seeing the Law Council’s view. It wants banking reforms referred to the Australian Law Reform Commission rather than rushed through in extra sitting weeks.

“I’m sceptical that adding six days to the parliamentary sitting calendar would achieve any meaningful progress on legislating the bank royal commission recommendations,” Wilkie said.

Earlier, Katter told Sky News he is negotiating with the prime minister and had told him he would find it “very difficult” to allow parliament to conclude without achieving reform on banking issues.

Katter said he was formulating a package alongside Nationals MP George Christensen, with the involvement of the government backbencher possibly making the plan easier for the prime minister to accept.

“We want some substantial action and I if I don’t get that I will find it very difficult to see how I wouldn’t give an extension of time,” he said. “And I’d say the same to the ALP – I’ll only give you an extension of time if I get a couple of things that I believe will never come out [otherwise].”

Katter complained that a number of banking issues had remained unaddressed by the royal commission, including that banks can “foreclose on you any time they like” and there had been a lack of “compensation and retribution” for victims despite four senior departures at AMP and NAB.

Katter said the two “lapdog” regulators – the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority – “need to go”.

Katter’s central proposal is for a cattle reconstruction board which would allow the government to borrow at 2.4% interest and provide low-interest loans to cattle farmers.

“I don’t think any government should loan it out and let the banks get the benefit … You take the bank debt, we will take it off you at a 30% discount.”

Katter said the proposal is “at the very heart of banking reform” because banks raise interest rates on struggling industries but governments should “use banking to put the interest rate down when you’re in trouble”.

Asked if this constituted a government bank, Katter responded “I suppose you could say that” but he “didn’t want to make it difficult for the free marketeers in the Liberal party and the Labor party to swallow it”.

Morrison told reporters in Canberra he had some “excellent meetings” with Katter about the reconstruction of the cattle industry.

“He put a question to me yesterday on this issue and I responded in kind. And we are working very closely on those issues that Bob has raised.”

Morrison said the government was working with Katter “because we should” and “because the northern Australian cattle industry needs our support”, rebuffing suggestions the negotiations were designed to avoid extra sitting weeks.

“This is an industry that has a huge future, but has literally been washed away in the last few days. And they will need our help to get them back on their feet and that’s what Bob and I are working on.”