The government plans to set up a company to manage bad debt for public sector banks, which is expected to reach record levels this year and is preventing them from giving out sufficient loans to businesses and consumers to spur growth in the economy.

This company will hold problem loans or non-performing assets (NPAs) for banks, which can then be sold on to investors at a reduced price, Finance Minister Nirmala Sitharaman in her budget speech on Monday.

She later explained at a press conference that the banks were not being able to dispose of these sour loans and this would be undertaken by the new company being set up. This would help the government-owned banks to recover part of their money and clean up their books, she said.

Indian banks, like others worldwide, are struggling with the devastating economic fallout of the coronavirus pandemic, which has hit borrowers’ ability to repay debts.

The Reserve Bank of India expects NPAs will rise to 13.5 per cent of total advances by the end of September from 7.5 per cent a year ago, according to its Financial Stability Report published last month. This is one of the highest levels among major economies.

Shares of Indian lenders surged with the Sensex shooting up as much as 6.5 per cent after the announcement of the stressed asset management company.

The government also plans to invest another Rs 20,000 crore public sector lenders from April 1, to enable them to give more loans to revive the economic activity, Sitharaman said.

She also disclosed plans to privatise two public sector banks and a state-run insurance firm, in addition to IDBI Bank.

After completing a mega-merger in 2019 that reduced the number of large state banks to 12 from 27, the government has been looking to reduce its stake in some lenders to raise more funds to curtail the fiscal deficit.

The government will also start the sale of a stake in Life Insurance Corp. after announcing the plans a year ago, Sitharaman said.