Bankers and analysts say banks' efforts to clean up their loan books are likely to prompt them to further clamp down on lending -- intensifying a credit crunch already weighing down Japan's battered economy. Banks will stop providing new loans to weak borrowers and will work even harder to call in existing debts, analysts say.

Politicians from Japan's ruling and opposition parties on Friday appeared to have achieved a compromise on how to deal with banks buckling under the weight of their bad loans.

Tokyo has already tried to both encourage bank lending and help troubled banks to survive by making public funds available to almost all banks in the hope this would prompt consolidation in the sector.

But the effort has had little effect oneasing credit and has so far resulted in no mergers.

The new compromise will include tough opposition proposals for winding up failed banks by nationalising and then liquidating them, as well as a policy framework to allow infusions of public money into weak but solvent banks to help them dispose of bad loans.

The ruling and opposition parties agreed to scrap the existing scheme allowing the use of up to 13 trillion yen in public funds to recapitalise banks.

Nozomu Kunishige, a senior analyst at Lehman Brothers in Tokyo, said the deal was likely to create a framework that would be clearer and tougher on bank managers and shareholders than the current law.

"That will create an incentive for big banks that are strong enough to stand on their own to try harder to restructure," he said. "Banks that are not so strong will have no alternative but to seek public funds or collapse."

The Japanese government has estimated total problem loans at no less than 87 trillion yen -- but some analysts say that eventhat huge figure is far too optimistic.

US credit-rating agency Standard & Poor's said this week that the real total could be equivalent to 30 per cent of Japan's annual gross domestic product -- over 150 trillion yen.

S&P Said Japan would need to spend as much as 75 trillion yen in public money to solve the bad loan problem.

The sense of crisis among the managers of Japan's big banks has been intensified by the decline of the ailing Long-Term Credit Bank of Japan (LTCB) , which has come under relentless attack from stock investors who expect it to fail.

"LTCB has been already declared dead by the stock market," said one bank official, who declined to be named.

How to deal with LTCB has become a key issue in the talks between politicians of the opposition and the ruling Liberal Democratic Party. The LDP had hoped to use public money to facilitate a merger of the ailing lender with Sumitomo Trust & Banking Co Ltd.

Opposition parties have said LTCB should become the first Japanese bank to be putunder state control and should be liquidated by the end of March 2001 -- even though financial authorities have not declared the bank insolvent.

Analysts said that to try to regain market confidence, big banks rated by credit rating agencies as weak were likely to be forced to reveal more information about their bad loan portfolios and to boost their capital with help from Japanese and foreign private companies.

Rating agency Moody's Investors Service has rated the financial strength of nine major Japanese banks as "E" -- meaning it considers them unable to resolve their loan quality problems soon without outside help.

The banks rated E include Fuji Bank Ltd, Sakura Bank Ltd and Daiwa Bank Ltd.

Sakura and Fuji each said recently they were asking member companies of their corporate groups and major shareholders to help them raise their capital.

Akira Takai, an analyst at Daiwa Institute of Research, said big banks would be eager to avoid the fate of LTCB.

"So they will make desperate efforts toclean up bad loan mess... But this means there will be an extreme credit crunch," he said.

Nikko Research Center analyst Kouya Hasegawa said a further tightening of banks' credit policies was likely to cause a crisis in the Japanese economy in late October and November. "Unless Japan solves the bad loan problems quickly, the economy will get worse," he said.