LONDON, Dec 16 (Reuters) – The European Union set out plans on Wednesday to help banks to jettison soured loans more easily and continue lending to households and business hit by the COVID-19 pandemic.

A lesson from the previous financial crisis was that failing to tackle unpaid or so-called non-performing loans (NPLs) left banks unable to keep lending, which is the lifeblood of recovery in a region that relies heavily on banks for corporate funding.

The volume of distressed loans is expected to rise next year after the expiry of mortgage repayment holidays for households and relief measures for companies, which were introduced when economies went into lockdown.

NPLs were 2.8% of loans at EU banks at the end of June, up 0.2 percentage points from the fourth quarter of 2019.

The European Central Bank’s head of banking supervision, Andrea Enria, has warned there could be a “huge wave” of unpaid loans that could top 1.4 trillion euros ($1.7 trillion).

“To do nothing would result in a credit crunch, which would mean businesses would fail even more so and jobs would be lost,” EU financial services commissioner Mairead McGuinness told reporters.

Building on previous measures in 2017, the European Commission set out proposals for a more efficient market for soured loans by creating a network of so-called bad banks to house problem debt, underpinned by a central database to enhance transparency and help to find buyers for the NPLs.

It stops short, however, of creating the EU-level bad bank that Enria had called for, as reaching agreement on this would have wasted “precious time”, an EU official said.

‘UNAMBITIOUS’

The Association for Financial Markets in Europe, a banking lobby group, said the action plan was an “unambitious” and won’t be enough to address a post-COVID build up of bad loans.

European consumer body BEUC said the measures left borrowers vulnerable to their loans falling into the hands of “vulture funds” that aggressively seek repayments, but McGuinness said borrower protection was “front and foremost” in the plans.

To improve transparency in selling loans, banks may be required to use a template to ensure that NPL details are comparable across the EU.

Brussels also wants more convergence in national insolvency rules and is proposing that a bank buying bad loans should not have to set aside more capital than the seller to cover against potential default.

The EU package also clarifies the bloc’s rules on state aid to banks during economic shocks, known as “precautionary measures”. Under this provision, no funds should be given to lenders that were already suffering problems before COVID-19.

“This package is not money for banks,” McGuinness said.

($1 = 0.8205 euros)

Reporting by Huw Jones; Editing by Kevin Liffey

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