(Bloomberg) -- Privatizations of small state-run banks will help make India’s financial sector stronger as fewer and bigger lenders emerge from mergers and sales, according to a top executive of an association representing the nation’s lenders.

“Privatizing small state run banks is a move to give a message to the market that the government wants limited big size public sector banks in the economy and hand over the small public sector banks to the private sector,” said Sunil Mehta, chief executive at Indian Banks’ Association in an interview with Bloomberg TV on Wednesday.

Prime Minister Narendra Modi’s government is keen to reduce the number of banks in the country and have only a handful of large state-run ones co-existing with private lenders to make the sector more competitive and efficient. The government has announced to privatize three state banks including IDBI Bank and two other yet to be named.

In 2019 the Modi government merged some state banks and brought down their number to 12 from 27.

The consolidation will help bring economies of scale at these banks, Mehta said.

A prolonged shadow lending crisis followed by the pandemic has added a massive bad loan pile at Indian lenders with a lion’s share of those being with the state banks. The soured debt is expected to rise in the next few months after the removal of relaxations that had so far allowed lenders to not classify loans as delinquent. An embargo on filing bankruptcy cases has also been lifted which will help banks to speed up recoveries.

The Reserve Bank of India in January had estimated the bad loan ratio to rise to 13.5% of outstanding loans at local lenders by September, up from 7.5% a year earlier: that would be the highest level since 1999.

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However, the resurgent coronavirus threatens to halt a nascent economic recovery and push up soured debt further. The RBI on Wednesday kept its key policy rate on hold and vowed to maintain accommodative policy for as long as is needed.

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The central bank has taken several steps to ease the bad loan burden on banks by allowing a loan repayment moratorium followed by a one-time debt restructuring to pandemic-hit firms. However, all such regulatory dispensations are now over and lenders are on their own to handle their balance sheet risks.

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