South Korea's financial watchdog said Thursday local banks should adjust down their bad loan ratio to below 1 percent by year-end.
According to the Financial Services Commission (FSC), the nation's bad loans stood at 19.6 trillion won, or 15.8 billion U.S. dollars as of end-June, taking up 1.5 percent of total lending.
The figure marked an advance from 19.3-trillion-won, or 15.3-billion-U.S. dollar, which the nation posted three months earlier, the FSC said.
To meet the target ratio, banks will probably need to clear off nearly 20 trillion won, or 16.1 billion U.S. dollars, in bad loans from their balance sheets
"There would be no penalty to be imposed on banks even if they could not lower the ratio below the guidance," an official at the FSC was quoted as saying in a press conference.
"It is still primarily needed to boost up banks financial soundness," the official said, adding that there is still a chance that bad debts may pile up despite of a recent slow down in bad loan growth.
The watchdog also said it will aggressively buy bad debts by tapping more of a state restructuring fund, planning on a 20 trillion won (16.1 billion U.S. dollars) expenditure this year out of a total 40 trillion won (32.2 billion U.S. dollars) fund.