Bank of Greece, the country’s central bank, is mulling to set up a ‘bad bank’ for cleaning up the sour loans weighing down the country’s banking industry, Reuters has reported.

The non-performing loans (NPLs) in the country’s banking sector have surged recently due to the Covid-19 pandemic.

In a report, the central bank said that the extent of the rise in such loans cannot be determined, however, addressing the NPLs is a priority.

The Greek central bank noted: “The Bank of Greece is processing a specific proposal for the implementation of a vehicle to comprehensively deal with problematic assets (Asset Management Company – AMC) for Greek banks.

“Dealing with a large pool of NPLs, which, contingent on macroeconomic developments will increase, is a priority.”

Moreover, the central bank governor Yannis Stournaras said that previously one of the options to reduce the burden of NPLs in the country is to deploy a bad bank and equip extra tools.

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Greek banks already have the Hercules asset protection scheme (HAPS) tool which helped them offload up to €30bn ($34.18bn) in bad loans last year, the Reuters report added.

The tool works like Italy’s GACS model. It offloads bad loans by bundling them into asset-backed securities and sold to investors.

As at the end of March this year, Greece’s bad loans accounted for 37.3% of the total loans.

According to Reuters, banks are aiming to bring this ratio down to less than 20% by the end of next year.