China should encourage the establishment of more bad loan banks to assist the disposal of the bad assets, global consulting firm McKinsey & Company said on Monday.

Chinese banks should also initiate a so-called "crash program" led by their presidents to form a professional and specialized work team to clear up the bad loans, the firm said in its latest report on the Chinese banking sector.

China should also broaden channels for the disposal of bad loans by pushing the asset-backed securitization and improving the transparency of a market-based pricing mechanism for problematic assets, the firm said in its report.

The surge of bad loans will pose a challenge for Chinese banks if they do not take swift actions to address the issue, John Qu, a senior partner at McKinsey & Company, said at a news conference.

Qu stressed that China should reduce the level of corporate leverage, a major factor that has caused the rise of bad loans in the banking sectors.

"When the economy is good, banks tend to offer excessive credit, which has led to misuse of loans by the companies such as investing the money in the stock market for speculative purpose," he said.