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Japanese banks should base their lending decisions on sound business principles in order to solve their bad-loan problems, Standard & Poor’s Corp., a U.S.-based credit rating firm, said in a report released Friday.

In the report, Naoko Nemoto, head of S&P’s financial services rating group in Tokyo, said various measures proposed recently by Japanese authorities to solve the problem have thus far focused on existing problem loans and those that are potentially problematic.

“But key initiatives to help prevent the re-emergence of bad loans have not received a similar degree of attention,” she says, warning that there are “no grounds at this stage to expect any improvement.”

Takamasa Yamaoka, a financial services ratings analyst for S&P in Tokyo, said, “Domestic banks are under pressure to play a public role as liquidity providers to the corporate sector, which is distorting lending decisions.”

He also criticized Japanese banks for being overly optimistic in assessing the feasibility of ailing firms’ restructuring plans, “particularly when they have long-standing, embedded relationships with borrowers.”

“Unless they change their credit assessment culture and guidelines alongside easing pressure to lend, bad loans will continue to emerge,” he said.

S&P reported that, as of Sept. 30, Japanese banks were saddled with about 32 trillion yen in bad loans, which accounts for 6.4 percent of their total loans. After netting loan-loss reserves, the problem loans still stood at 20 trillion yen or 4.1 percent of the total.

“Nonetheless, bad loans continue to emerge at a high rate,” the report says.

As reasons for the increase, it cites the Japanese banking culture, under which banks are often unwilling to close out loans to ailing borrowers due to pressure to maintain their public profiles. It also pinpoints their “main creditor bank” role, under which they are expected to provide greater credit than other financial institutions.

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