NEW DELHI (Reuters) - India’s federal government wants the Reserve Bank of India to set up a fund to buy out stressed assets of the country’s top 25 shadow lenders and revive the financial sector, a government source told reporters on Thursday.

A worker walks past the logo of Reserve Bank of India (RBI) inside its office in New Delhi, July 8, 2019. REUTERS/Anushree Fadnavis/Files

The shadow banking sector has been battling a credit crunch ever since one of the sector’s biggest firms Infrastructure Leasing & Financial Services collapsed in late 2018 amid fraud allegations.

The finance ministry has proposed a bailout plan on the lines of the U.S. Troubled Asset Relief Programme following the 2008 financial crisis to pull India’s financial sector out of a deep slump and get credit flowing back into a weak economy, the source told a group of reporters.

“Talks are on and various rounds of discussions have happened with the central bank on a mini TARP-like programme,” the source who is involved in the discussions told reporters.

“RBI could be the buyer of last resort”,” the source, who cannot be named in line with his service rules, said.

In 2008, United States Treasury Department had worked out a $700 billion bailout plan to address the financial crisis.

India’s government has been considering measures to revive the financial sector to get boost economic growth after five straight quarters of declines. A further decline in the growth rate is forecast for the July-September period, in data due out on Friday.

Shadow lenders account for a large chunk of India’s credit market, accounting for a 30% share of auto loans and more than 40% of home loans as of December 2018, according to the central bank.

The government official said that the RBI has been reluctant to open its balance sheet for a large bail out programme for the shadow banks as it feels the step is too drastic and more discussions are required.

The RBI declined to comment on the government source’s remarks.

Any new measure is likely to help such as Indiabulls Housing Finance, Piramal Enterprises, Reliance Capital, Shriram Transport Finance and Mahindra & Mahindra Financial Services.

Shares of Piramal rose nearly 5% to 1830.70 rupees a share, while Shriram Transport Finance company rose 1.3% to 1,155 a piece from 1,140 rupees, after the news before paring some gains.

The new proposal comes after the government’s 1 trillion rupees partial credit guarantee scheme under which state run banks would buy high-rated pooled assets of financially sound shadow lenders failed to take off.

Banks, which are burdened with over 9 trillion rupees of bad loans of their own, remain risk averse.

The government has also asked the central bank to consider a one time waiver to banks from classifying some real estate loans as bad loans, the official said.