South Korea's bad loan ratio fell in 2012 from a year earlier as banks rushed to clean up such loans, the financial watchdog said Monday.

The ratio of loans classified as substandard or below was 1.32 percent of the total loans extended by banks as of the end of 2012, down 0.04 percentage points from a year before, according to the Financial Supervisory Service (FSS).

The bad loan ratio fell after rising to 1.56 percent in the third quarter as banks actively disposed such loans in the fourth quarter. Bad loans resolved in the last three-month period were 9. 8 trillion won (-- billion U.S. dollars), up from 4.8 trillion won in the third quarter.

The country's bad loan ratio was relatively low compared with a 3.9 percent of noncurrent loan ratio for the U.S. and a 2.4 percent of non-performing loan ratio for Japan.

The watchdog said it will encourage banks that failed to meet the bad loan ratio target of 13 percent in 2012 to set up and implement plans to clean up bad loans.

As of end-2012, the bad loan ratios for Woori, Kookmin, Korea Development Bank (KDB) and Industrial Bank of Korea (IBK) were 1. 66 percent, 1.34 percent, 1.48 percent and 1.39 percent each, missing the watchdog's target.