A government advisory panel has come up with a soft approach to bad-loan problems at regional banks, government sources said Wednesday.

In drafting an action program for monitoring the regional financial system, a working group in the Financial System Council held off on setting a numerical bad-debt reduction target and a specific time frame.

The draft instead urges regional banks, "shinkin" credit banks and other regional financial institutions to submit their own plans on how to restructure their operations while continuing to finance their local economies.

The Financial Services Agency is expected to reveal the program as early as Thursday, shortly after the advisory panel officially proposes the new guidelines.

The approach is soft in relation to the FSA's revitalization program for banking groups with nationwide networks, which are required to accelerate bad-loan disposals so they can halve their ratios to all loans by the end of fiscal 2004.

Sources familiar with the situation said members of the advisory panel are concerned that rapid bad-loan disposals by regional institutions would cause small and medium-size companies on life support to completely collapse.

Under the circumstances, the panel members agreed that regional lenders should move ahead with their bad-loan disposals in tandem with efforts to put local economies and businesses back on their feet at a steady, if slower, pace.

Other draft proposals include setting up a task force in each regional block to bolster economic activities and facilitate the disclosure of information as part of an effort to bolster corporate governance at financial institutions, the sources said.

In addition to looking at capital adequacy ratios and other visible financial data, the FSA will evaluate institutions' contributions to the local community in gauging the soundness of management.