Bad loans at Philippine banks dropped to 3.56 percent of total loans outstanding at the end of March from 3.73 percent the previous month, the central bank said on Friday.

The improvement in the non-performing loan ratio reflected a 1.32 percent decline in bad loans and a 3.25 percent rise in total loans in March, the central bank said in a statement.

The bad loan ratio has much improved after the government imposed a law that for a limited time granted incentives to buyers of banks' soured assets.

Bad loans peaked at more than 18 percent in October 2001 following defaults by corporate borrowers as a consequence of the Asian financial crisis. Prior to that crisis, which erupted in mid-1997, the bad loan ratio had stayed below 4 percent.