The ruling coalition finalized a bill Wednesday to expand the government-funded Resolution and Collection Corp.'s powers to clean up banks' nonperforming loans.

The bill, which would amend the Financial Reconstruction Law, is expected to be submitted to the Diet next Tuesday, they said.

Its enactment would represent one of the first concrete moves by Prime Minister Junichiro Koizumi's administration to help speed up the disposal of banks' bad loans.

The bill calls for RCC to make "maximum efforts" to dispose of the bad loans within three years after purchasing them from debt-strapped banks.

It further allows RCC to set up a fund to help the rehabilitation of companies whose loans it buys.

But doubts persist over whether RCC has the skills to enact schemes to solve the debt problems. Experts believe RCC is incapable of disposing of bad loans in a timely manner and point to the possibility that souring loans sold to RCC may indefinitely remain on the government's balance sheet, possibly with growing secondary latent losses.

Under the bill, RCC would be allowed to purchase bad loans from banks at market value. They would also be able to purchase so-called gray loans that are in danger of souring. The plan will further allow RCC to participate in bidding for bad loans.

But the bill does not specify what to do if purchased loans incur secondary losses.

To protect taxpayer money, the current law effectively bans the publicly funded RCC from incurring losses when it sells bad loans bought from banks on the market.

RCC has therefore bought loans at a discount, paying an average 3.8 percent of the original book value. At times, RCC has been forced to pay only 1 yen when purchasing virtually valueless collateral taken on soured loans, officials said.

The current restrictions have raised criticism from the Liberal Democratic Party and its coalition partners -- New Komeito and the New Conservative Party -- that this practice has discouraged banks from asking RCC to buy their bad loans, causing a delay in banks' bad-loan disposal.

But the actual wording of the draft bill caused repeated delays in its finalization.

Coalition members were unable to agree on whether to set a three- or five-year limit for RCC to resell the loans it purchases, settling on the "maximum effort" clause in the end.

"The milder phrasing shows consideration for New Komeito's concerns," party member Takayoshi Taniguchi said at a press briefing. He had argued that the three-year limit would force RCC to sell its loans, perhaps at a huge loss that would ultimately cost taxpayers.

"But a time limit, even a conditional one, is necessary for speedier bad-loan disposal," said the NCP's Yuriko Koike.

RCC's reforms go along with plans to allow the Financial Services Agency to conduct special inspections of banks, their bad loans and the business conditions of their clients. Instead of retrospective inspections of banks every one to two years, the FSA will step in when the banks are compiling their results and focus on specific debtors.

Public funds option

Prime Minister Junichiro Koizumi said Wednesday it is possible the government may inject public funds into troubled banks if there is risk of a financial crisis.

"It may be possible to inject public funds to avoid any unnecessary disorder in the financial system," Koizumi told a House of Councilors panel.

"There's no such need at the moment, but if a problem arises that could trigger a global financial crisis, we will respond in a bold and flexible manner," he said.

The government injected massive amounts of public funds into major Japanese banks in March 1999 to bolster their weak capital bases to treat a serious domestic financial crisis.