The EU has set out plans to help banks to ditch bad loans more easily, by supporting member states in setting up NAMA-style national "bad banks" if they want to and allowing them recapitalise lenders under certain circumstances.

The European Commission said the aim of the proposals is to ensure continued lending to households and businesses hit by the Covid-19 pandemic.

A lesson from the last financial crisis was that failing to tackle unpaid or "non-performing" loans (NPLs) left banks unable to lend, the lifeblood of recovery in a region such as Europe 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 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.

"Today we put forward a set of measures that, while ensuring borrower protection, can help prevent a rise in NPLs similar to the one after the last financial crisis," said EU financial services commissioner Mairead McGuinness.

Building on previous measures, the European Commission set out proposals for a more efficient market for soured loans.

It said it would support members states who want to create national "bad banks" like the National Asset Management Agency (NAMA) to buy bad loans and explore how cooperation could be fostered by establishing a network of these institutions.

It stops short, however, of creating the EU-level bad bank that Enria had called for.

Commission Executive Vice-President, Valdis Dombrovskis, said because debts are enforced through national insolvency laws the approach cannot be feasibly "lifted to the European level".

Ms McGuinness emphasised the importance of acting early and decisively to ensure banks can keep lending.

She said in the previous crisis people were not prepared for what was coming, but fact the Commission is taking action now shows it knows it needs to prepare effectively for what may be ahead.

"Anyone who would forget the past would be doing a disservice to the past," she said.

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.

It also wants to further develop secondary markets for distressed assets underpinned by a central database to enhance transparency.

The EU package also clarifies the bloc's rules on state aid to banks during economic shocks such as the pandemic, known as "precautionary measures". 

Under this provision, no funds should be given to lenders already suffering problems and any assistance should be targeted and temporary in nature.

However, Sinn Féin MEP Chris MacManus said the proposals launched today put the interests of banks and vulture funds before those of people. 

He said they amounted to a punishment for people who have lost their livelihood as a result of a global pandemic.

Ms McGuinnness said the Commission was not just looking at NPLs without acknowledging that borrower protection was absolutely front and centre.

Additional reporting from Reuters