Japan loan moratorium would cover interest -source

TOKYO Oct 6 (Reuters) - A proposed loan moratorium aimed at supporting small Japanese firms will cover the interest as well as the principal on loans, according to a source with direct knowledge of the preliminary draft of the proposal.

Shizuka Kamei, appointed minister for bank regulation last month, has been pushing a controversial plan to temporarily suspend the repayment of loans by small firms and individuals hit by the economic downturn. [ID:nT137543] [ID:nT165512]

A team headed by Kamei's deputy minister, Kouhei Otsuka, has been working on the details of the plan, including the length of the moratorium and whether it would apply to just the principal or to both the principal and interest on loans.

The preliminary draft by Otsuka's working group says the moratorium should cover both principal and interest, the source said, speaking on condition of anonymity because the details have not been made public.

Opinion in the group remains split on the length of the moratorium, however, and the draft contains provisions for terms of both 1-2 years and 3 years, the source said.

The group plans to put together a second draft by Friday that will form the basis of a bill to be put to parliament.

Kamei's moratorium proposal has sparked criticism from investors and analysts worried that it would keep inefficient small firms afloat, saddling the banking sector with bad loans and weighing on the economy.

According to another source familiar with the matter, the draft contains a provision allowing banks to not classify loans as non-performing even if the borrower uses the moratorium scheme. (Reporting by Noriyuki Hirata; Editing by Edwina Gibbs)