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JAPANESE LENDING – Keen reformers of credit regulation in Japan are disappointed with draft bill containing loopholes. No effective strengthening of consumer protection and lowering of usury ceilings. Delay in legislation should give more time to broadening of credit databases and greater domestic bank involvement in personal lending.
(Sep 7th 2006, The Economist)


WEEKLY manga magazines such as Shonen Magazine, which targets males in their late teens and early twenties, are fairly barren when it comes to advertisements. That makes the glossy ads they carry for consumer-finance companies stand out. That Japanese youths are being persuaded borrowing money is easy is one reason why the Financial Services Agency (FSA), the banking watchdog, and a subcommittee on consumer-finance reform within the ruling Liberal Democratic Party (LDP) have been working on what was meant to be one of the most thorough overhauls the industry has undergone.

Yet despite lots of bravado, the FSA's draft bill, unveiled on September 5th, was a sore disappointment to those who favour big changes. The row it has sparked has led Masazumi Gotoda, vice-minister in charge of financial services (and a member of the LDP), to resign. It may cause a delay in the submission of a bill to the Diet, which had been expected later this year.

Reformers worry that too many Japanese are borrowing more than they can hope to repay. They had hoped for limits on consumers' ability to borrow from several lenders and tighter caps on interest rates. Leading consumer-finance firms say that only 7% of borrowers owe money to more than one lender, but because the industry's credit database does not cover many of its 14,000 mostly tiny firms, the true number is probably much higher.

The FSA has proposed some changes that will address such worries. Its draft bill would replace the existing muddle of two different maximum lending rates (one of 15-20%, the other of 29%) with the lower of the two. It would also raise capital requirements for lenders and make membership of the credit database compulsory.

The row and Mr Gotoda's resignation were provoked by some loopholes that would delay some changes by as much as eight years after the reform's eventual approval. Although the interest-rate cap will be lowered, the FSA has proposed phasing this in over three years. “I would be ashamed to be part of an agency that is lenient towards lenders and protects consumers insufficiently,” says Mr Gotoda. What irks Mr Gotoda and others is that for a further five years rates of 28% will be permitted on loans of up to ¥500,000 ($4,350) paid back within a year, or on six-month loans of up to ¥300,000. Given that these amounts exceed the average loan, this will in effect allow consumer-finance companies to carry on lending at 28%, while borrowing for next to nothing.

At the same time, the proposal has annoyed lenders, who wanted the cap unchanged. The biggest, which include local subsidiaries of Citigroup and GE Capital, are fighting back, even hoping to persuade America's Treasury to intervene.

With official Japanese interest rates so low, such high consumer-lending rates may seem curious. Those with the healthiest credit records can indeed borrow for a mere 5-6%. The mass of potential borrowers, though, who can get by without turning to the consumer-lending companies, are ill served. Japanese banks, which are subject to the 15-20% rate cap, may one day fill the gap, but they have shied away from mass-market personal lending.

One effect of a prompt reform would have been to bankrupt the most heavily indebted borrowers, as lenders called in their loans. Postponing change for so long puts off the inevitable. That may be less welcome than it sounds. Now that personal bankruptcy laws have become more lenient, there is less reason for desperate borrowers to delay. Settlements before cases reach court are also increasingly popular. The FSA had said it needed to be cruel to be kind. It has flinched, but the argument rages on.

ID: 38520
Author(s): iff
Publication date: 07/09/06

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Created: 12/09/06. Last changed: 12/09/06.
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