Posted by: Kenji Hall on November 3, 2009
In Japan’s consumer lending industry, there has been little to cheer about lately. Less than three years ago, the government began tightening rules on consumer financing firms to discourage them from charging consumers exorbitant rates on loans. It also let borrowers who had crushingly high interest payments request a refund. Then came the global financial crisis, piling on the pain for consumer lenders.
One sign of just how bad things have gotten: In late September, Aiful, Japan’s second-biggest consumer lender, asked its own creditors for more time to pay off debts. With new tougher regulations set to go into effect next June, including a lower cap on what consumer lenders can charge, the industry was starting to resemble a train wreck in slow motion. Last fiscal year, Promise and Takefuji swung to an operating loss, while Acom’s profits fell to less than half the previous year’s level. By the end of September, the number of consumer lenders had fallen to less than 5,000, from more than 14,200 in March 2006, according to the Financial Services Agency.
Now Japan’s government seems ready to offer a reprieve. Yesterday, the financial daily Nikkei reported that Prime Minister Yukio Hatoyama plans to form a study group this month that will consider putting off some of the harshest rules governing consumer lenders. The rules set to start next summer would lower the maximum rate lenders can charge consumers from 29.2% to 20% and limit certain loans to a third of a borrower’s income. The Nikkei report sent share of Japan’s four biggest consumer lenders—Aiful, Takefuji, Acom and Promise—sharply higher yesterday. Takefuji’s shares rose 23%, while Promise and Acom posted 17% gains.
The government isn’t just trying to help consumer lenders, which need the help. (They lost nearly $49 billion in part because borrowers contested high rates or were unable to pay interest or keep up with loan repayments.) It’s also targeting many self-employed Japanese who appear to have borrowed from consumer lenders to stay afloat. More than half of these borrowers would be ineligible for more loans under the new rules, according to a study published by the Japan Financial Services Assn. last month.
Japan’s top banks would also get a boost if the government study group acts. Mitsubishi UFJ Financial Group owns Acom, and Sumitomo Mitsui Financial Group is part owner of Promise. And while Takefuji and Aiful aren’t directly backed by a major bank, they count big financial institutions among their top creditors and investors.
But government-led efforts to throw a lifeline to certain sectors could be divisive. Some Western bankers are already crying foul over what they see as a deliberate attempt by politicians to prop up deadbeat companies. Nobody will go on the record to say so but several whom I’ve spoken with point to falling bankruptcies, looser rules on how banks must report bad loans, the government’s moves to save JAL as evidence that this is happening. (And, of course, not everyone I spoke to agreed with that view.)
In September, the number of companies that went out of business fell 15.7% to 946, from a year earlier, according to Tokyo-based market researcher Teikoku Databank. It was the first drop since May 2008. And on Oct. 30, Financial Services Minister Shizuka Kamei submitted legislation to Parliament that would help small businesses reschedule bank loans—giving them more leeway to avoid collapse.
Among critical Western bankers, Japan Airlines is Exhibit A.
The troubled carrier's appeal for public assistance has dragged on for months. Its rehabilitation is now being overseen by the Enterprise Turnaround Initiative Corp., which could demand drastic steps before agreeing to a plan for public funding. Why not just let JAL fail? “If JAL went bankrupt, there would be major repercussions for Japan’s economy,” Japan’s transport minister Seiji Maehara told reporter on Oct. 29.
Aiful's plight has drawn plenty of criticism as well. In September, the consumer lender, facing the possibility of bankruptcy, said it would resort to a closed-door negotiating procedure, called alternative dispute resolution. ADR lets Aiful ask for more time to repay its debts to around 70 creditors. But it's still not often used, and some bankers saw Aiful's decision as a way to delay what they saw as certain default.
One creditor protested: Aozora Bank, a mid-sized Tokyo-based bank whose largest shareholder is private equity firm Cerberus Capital Management. The bank, owed nearly 38 billion yen ($420 million) as of August, felt that Aiful was already in default.
Why would a bank want a borrower to go out of business? Aozora sought to cash out of securities that insure holders against default on many types of debt, called credit default swaps. Such swaps are privately negotiated, not traded on an exchange. Banks and hedge funds use them to hedge or speculate on a borrower's ability to repay its debt. But Aozora couldn't recoup some of its investment from the credit default swaps unless Aiful had been ruled in default. ADR blurred the line between when a company is in default--does it begin with rescheduling debt payments--and when it isn't. On Oct. 2, Aozora took up its case with the International Swaps and Derivatives Assn. Four days later, the ISDA rejected Aozora's claim.