FILE PHOTO: The building of the European Central Bank (ECB) before the ECB's monetary policy meeting in Frankfurt, Germany, June 6, 2024. REUTERS/Wolfgang Rattay/File Photo

FRANKFURT (Reuters) -The European Central Bank is increasing pressure on small banks to tackle loans that went sour more than six years ago by forcing them to set aside more money to cover potential losses.

In guidelines published on Monday, the ECB said "less significant institutions" too, like their larger rivals, would have to make growing provisions for their stock of unpaid loans.

Small banks had so far been exempted from this provisioning schedule. This has resulted in a lower coverage ratio, which measures provisions against so-called non-performing loans (NPL), than at larger banks.

"Some smaller banks continue to face challenges stemming from persistent stocks of long-standing NPLs," Sharon Donnery, a member of the Supervisory Board of the ECB, said in a blog post, adding that they maintain fewer reserves to cover potential losses.

The ECB's move follows an increase in NPLs - from 1.7% to 2.3% - on the book of smaller banks.

The new guidelines will be phased in gradually until the end of 2028 and apply to loans originated before April 26, 2019. Banks with negligible amounts of bad loans will be exempted.

The ECB will now consult the industry on the new guidelines until October 27.

(Reporting by Francesco Canepa, Editing by Louise Heavens)