The Financial Services Agency reported Friday that the nation's 11 largest banks incurred additional bad loan disposal costs of 1.3 trillion yen for the 2002 business year, which ended in March.

The report was unveiled as a result of a second round of special on-site bank inspections conducted by the FSA through Thursday.

The 11 largest banks also set aside an additional 500 billion yen to cover future loan losses for the business year to prepare for the worst from their debt-ridden borrowers, financial regulators said.

The on-site inspections into the financial status of the largest problem borrowers will provide valuable information when determining whether to nationalize banks, FSA officials said.

The move to increase reserves for future loan losses comes from adopting U.S.-style methods to calculate potential losses.

The new "discount cash flow" method cost banks 400 billion yen in loan loss reserves, as they were forced to set aside funds to cover 35 percent of loans not covered by collateral -- up from 22 percent. The nation's major banks have uniformly lowered projected earnings for the 2002 business year.

"We will see some rough terrain in the future, but we are moving forward," said Financial Services Minister Heizo Takenaka.

Major banks downgraded loans for 27 firms, who borrowed a total of 2.4 trillion yen, after the FSA launched its inspections Jan. 27.

The probe covered 14.4 trillion yen in loans held by 167 large borrowers that have debts totaling 10 billion yen or more and have watched share prices and credit ratings drop.

The nation's seven major banking groups now estimate losses resulting from bad-loan disposals to come to some 5 trillion yen for fiscal 2002, up around 1.8 trillion yen from projections made in November. The latest round of special inspections are part of the FSA's plan to see whether major banks are accurately assessing risks of default for major borrowers undergoing restructuring.