"We shouldn't be simply pushing loans up for the sake of it unless we are absolutely sure that these loans are really given to people who are creditworthy," Mohamed Ariff, executive director of the Malaysian Institute of Economic Research said.

"Otherwise, we may end up with another NPL problem eventually," he told reporters at an MIER economic conference.

A sharp rise in non-performing loans (NPLs) of the private sector forced the government to set up an asset management firm Pengurusan Danaharta Nasional Bhd, last year following the regional financial crisis.

Danaharta announced this month that it had all but finished buying up NPLs from the country's banking system.

Malaysia has set a minimum annual loan growth target of eight per cent through the course of this year over end-1998'stotal outstanding loans, to help speed up economic recovery.

Bank Negara, the central bank, said banks' net NPLs had fallen to 12.7 per cent in May from nearly 15 per cent in November, based on three-month NPL classification.

But analysts and many banks have said the industry's performance so far has been far below that.

Prime minister Mahathir Mohamad had repeatedly warned errant bankers that they risked losing their jobs if they failed to meet the target.

Finance minister Daim Zainuddin this month publicly threatened to close banks if the weak lending trend persisted.

MIER's Ariff said it would not be in the interest of Malaysia to push up loans too high due to the country's relatively high domestic debt ratio.

"I think we still have a very high loan profile.

"One weakness of our economy is we have a very high domestic debt as a percentage of the GDP -- in fact the highest in southeast Asia," he said.

"It may not be in our interest to push loans too high because the ratio of loans to the GDPis still very high," Ariff added, without giving any figures.

The government-backed MIER earlier on Tuesday forecast Malaysia's 1999 gross domestic product up 1.8 per cent on last year's. It saw 2000 GDP up 4.3 per cent.

These compare with the official projections of one per cent growth for 1999 and five per cent for 2000. The economy was down 7.5 per cent last year amid the country's first recession in 14 years.

Ariff told reporters that it would be undesirable to let already low domestic interest rates to fall any further.

"We believe the interest rates are already low and the monetary policy is already quite relaxed. It is undesirable to ease any further because you may then run into a liquidity trap," he said.

Malaysia's benchmark three-month interbank rate stood at 3.38 per cent on Tuesday, down sharply from 6.43 per cent in January.