The banks are still shaking off the effects of late 1997, when the Asian financial crisis forced the Government to seek a $58.35 billion bail-out led by the International Monetary Fund (IMF) and prompted the nationalisation of several top lenders.

On Friday, the Financial Supervisory Service (FSS) said it wanted banks to take a step the IMF had said could wait until the end of 2001 - provisioning for possible losses stemming from exposure to companies under debt restructuring programmes, such as Daewoo Group firms.

Analysts said the extra provisioning would hurt banks' profitability and even push troubled banks to merge to stay in business.

"The provisioning will help bring back confidence in thebanking sector," ING-Baring Securities' financial analyst, Mok Young-Choong, said. "But it raises possibility of banks running into the red."

The FSS said the move was need to allay concerns that banks harboured hidden debts. "In order to remove uncertainty in the financial markets and restore market confidence, we saw a need to reveal internally and externally the banks' potential losses as accurately and transparently as possible," FSS Deputy governor Kang Byoung-ho said. The banks have already acted, setting aside surplus provisions of more than $1 billion. The FSS said that the surplus, some 1.18 trillion won, ought to be raised to 5.11 trillion won, adding that it believed the banks would be able to do so. Kang said if doing so caused a lender's capital adequacy ratio to fall below a required 8 per cent, the bank would be asked to come up with a recapitalisation plan.

The wider provisions covered loans on which recovery prospects are substandard, doubtful, and deemed estimated losses. Kang said banks would be asked to reflect their extra-provisioning on their balance sheets by December.

"Banks should write off non-performing loans that are irrecoverable as soon as possible and sell recoverable NPLs to domestic and foreign investors to become clean banks," he said.

It said such loans stood at 64.19 trillion won at the end of March - 47.45 trillion for commercial banks and 16.74 trillion for "special purpose" banks such as Korea Development Bank and the Export and Import Bank of Korea.

-- (Reuters)