April 12, 2002
Financial Services Agency

Measures for Developing Stronger Financial System

1. Promoting the disposal of Non-Performing Loans (NPLs)

• The current framework, with a view to promoting the disposal of NPLs, sets out a three-year time limit within which the major banks are to take specific measures to remove loans (newly) classified as ''in danger of bankruptcy'' and below from their balance sheets.
  In order to accelerate the removal of NPLs from the banks' balance sheets under this framework, they are further requested to take specific measures to dispose, in principle, one half of such loans within a year and a major part (around 80%) of them within two years as concrete targets.
• The banks are requested to utilize aggressively the various functions of the Resolution and Collection Corporation (RCC) including the trust functions to fully enhance the attainment of the above-mentioned targets for disposal.

2. Introduction of year-round inspections and inspections by specialized sections corresponding to each major banking group

• Inspection units of the Inspection Bureau are to be reorganized corresponding to each major banking group in order to enhance the effectiveness and efficiency of inspections by establishing a de facto resident inspector system. In this system, inspections of each group will be assigned to each unit, thus each unit will be able to specialize in inspections of financial institutions within a group throughout a year on a continuous basis.
• In order to check the adequacy and strength of specific areas such as internal audit function of the groups, special teams consisting of experts with ample experiences in the private sector are to conduct inspections on specified areas across the banking groups.

3. Promoting consolidation of financial institutions

• In order to strengthen the Japanese financial system, measures will be promoted to further strengthen the basis for increasing the profitability of financial institutions. At the same time, with a view to ensuring smooth financing of small and medium sized enterprises (SMEs), measures will be explored expeditiously to promote consolidation of financial institutions, with regional institutions in mind.

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Ensuring the implementation of inspections properly reflecting the business conditions of SMEs

• In order to ensure proper inspections by enhancing accurate understanding of business conditions of SMEs, the FSA will compile a ''Supplement to the Financial Inspection Manuals: Treatment of Classifications regarding Credits to Small and Medium Sized Enterprises'' as a guide to the existing Inspection Manuals containing concrete examples of the treatment of credits to SMEs in terms of asset classifications. A draft version of the Supplement will become available for public comments.
• In addition to the above, classification of borrowers who receives credits lower than the threshold level (*) will in principle rely on self-assessment of assets by each financial institution if these institutions are sound in terms of asset quality, and have shown good results in the previous on-site inspections.

(*)	the lesser amount of either 20 million yen or 1% of total capital (the sum of capital contributions by participants of a credit union).