Financial institutions held 57.9 trillion won ($51 billion)in NPLs at the end of September, down from 63.4 trillion at the end of June, the Financial Supervisory Service (FSS) said.

NPLs accounted for 10.1 percent of the 574.1 trillion wonin total credits extended by Financial institutions.

Sector analysts said the NPLs might snowball to about 90trillion won, or 20 percent of outstanding loans, by the end of December as the restructuring of Korea's second largest conglomerate took shape.

"The ratio of NPLs to total debt may rise to about 20percent as NPLs increase to 90 trillion won by the end of the year," said Baek Jong-il, senior banking analyst at Hyundai Securities.

"That's enormous by any standards." South Korea's fragile Financial firms are expected tosuffer huge losses stemming from the debt restructuring of the troubled Daewoo Group with its 86.8 trillion won in debts. Financial institutions hold about 64 trillion won in Daewoo debt.The FSS acknowledged NPLs could rise in the fourth quarterin the face of Daewoo's ongoing restructuring and as more Financial firms adopted stricter NPL standards.

But it said it did not foresee a significant increase,considering the continued expansion of the economy."NPLs will continue to increase until next year as bankstighten their belts in lending to maintain healthy capital adequacy ratios required by the government," said Kim Byong-sok, senior analyst at Hannuri Investment Securities."We will see small- and mid-sized companies going bankruptand raising the amount of NPLs," he said.

NPLs are defined as loans on which interest has not beenpaid for three months and those held by companies suffering severe Financial troubles.Banks held 30.1 trillion won in NPLs while non-bankinginstitutions had a total of 27.8 trillion won worth, the FSS said in a statement.

The regulator said NPLs fell in the third quarter on ayear-on-year basis despite stricter NPL definitions adopted by financial institutions.It said this was primarily because of the purchase of 8.4trillion won in NPLs by the Korea Asset Management Corp, the state-run agency that buys bad bank loans.

The analysts said the financial sector was undergoing adramatic change with the introduction of forward-looking criteria, under which Korea's banks are asked to beef up credit risk assessment.The FSS said on Monday all domestic banks including merchant banks conformed to regulations on excessive lending as of the end of September.