TOKYO (Reuters) - Four years after Japan tightened rules on the consumer finance industry - and wiped out thousands of non-bank moneylenders - some lawmakers in the ruling Liberal Democratic Party want to shift back to deregulation, arguing this would help small businesses access the cash they need and fuel economic growth.
The LDP-led government began tightening regulations in consumer lending in 2006, as millions of individuals and small firms took on debts they couldn’t repay and as criticism grew over the menacing methods used by some to collect debts.
By 2010, the new rules cut the top rate of interest the moneylenders could charge to 15-20 percent from almost 30 percent, and capped how much individuals could borrow. The move whittled down the number of specialist unsecured loan lenders from around 5,200 in March 2004 to just 521 last year.
Now, a group of more than a dozen LDP lawmakers plans to submit a bill to the parliament, or Diet, later this year, and may seek to undo those changes - doubling the maximum interest rate lenders can charge and removing the borrowing ceiling. The draft has yet to be finalised.
They say regulation has strangled small businesses who get short shrift from Japan’s big banks and who need short-term loans to tide them over. They also argue that those who can’t now go to consumer lenders for cash resort to unregulated loan sharks. The number of arrests of such illegal lenders, which had been declining until 2012, rose 5 percent last year to 341, according to the National Police Agency.
“I‘m supporting the move for deregulation to rebuild a market for short-term small loans for healthy lenders and borrowers,” said Kiyohiko Toyama, a lawmaker for the New Komeito party, LDP’s coalition partner. “There used to be a market where people could borrow less than 300,000 yen ($2,900) for about three months. But that market’s vanished.”
Hiroshi Domoto, a professor at Tokyo University of Information Sciences, said the industry’s regulation had been driven to try to help those who over-borrowed. “But now we have to focus on those who aren’t able to borrow,” he said.
The tighter regulation starved consumers of cash and hit spending, leaving as much as an 18 trillion yen ($176.4 billion) dent in Japan’s economy over 2006-12, Takashi Iwamoto, a project professor at the Graduate School of Business Administration at Keio University, estimated last year.
In early 2007, more than 1.8 million Japanese were each carrying five loans, according to the Financial Services Agency (FSA). By March of this year, that number was almost ten times fewer. Regulation capped borrowing from multiple lenders to the equivalent of one third of an individual’s annual salary, and sought tougher penalties against illegal loan collection - which had become a social issue.
In one extreme case, a debt collector at Nichiei Co, a non-bank lender specializing in business loans, was arrested in 1999 after trying to force a customer to sell an eyeball and other organs to raise money to repay a loan. Nichiei subsequently went bankrupt in 2009.
In May 2008, the FSA ordered Takefuji Corp - which also later collapsed - to stop its heavy-handed tactics, which included banging on doors and playing loud music outside customers’ homes with the lyrics “Return the money you have borrowed.” Two years earlier, the agency ordered Aiful Co (8572.T) to suspend operations at all its branches - some for 25 days - over its debt collection practices. One employee repeatedly phoned and wrote to a debtor’s mother demanding repayment. Another made multiple calls to a debtor’s workplace.
The tighter regulation meant lenders were reluctant to lend as the lower rates left them more exposed to defaults. In the year to March 2004, consumer lenders extended 10.57 trillion yen in unsecured loans to consumers. In the year to March 2013, that had dropped to 2.4 trillion yen, according to the FSA, the industry watchdog.
Decades of ultra-low interest rates helped Japan’s big corporate managers raise funds cheaply, but smaller customers were often ignored as banks tended to lend primarily to those with good credit and collateral, such as property.
“Japanese banks lend based on collateral. They don’t price the loans-to-risk of each individual,” said Hirofumi Gomi, who was the FSA commissioner when parliament unanimously approved the industry’s regulation in 2006. “It’s natural that people who can’t borrow from banks go to consumer lenders. That’s why consumer lenders could create their own niche.”
Today, just three consumer lenders dominate the industry.
Promise, part of Sumitomo Mitsui Financial Group’s (SMFG) (8316.T) SMBC Consumer Finance unit, has a similar amount, while SMFG also has another consumer lending company called Mobit, with 181 billion yen of unsecured consumer loans outstanding. Aiful has around 216 billion yen in loans.
For the banks, these businesses aren’t major money spinners. SMBC Consumer Finance made a net profit of just 29 billion yen in the year to end-March, a fraction of the banking group’s 835.4 billion yen. Acom contributed just 10.6 billion yen to MUFG’s annual net profit of 984.4 billion yen.
For now, the LDP group doesn’t have the support of consumer lenders or the FSA, the industry watchdog.
“The discussion on whether or not to revise the law should be focused on consumers’ funding needs. Any revision of the law should be for the benefit of the customers,” Acom said.
A senior FSA official involved in regulation said: “There needs to be a very careful consideration over whether or not to increase interest rates again.”
Masaaki Taira, an LDP lawmaker who heads the party committee seeking deregulation, says the problem of those with heavy debts should be tackled as a social welfare issue, not through monetary policy. “We will be discussing the possibility of raising interest rates and abolishing the borrowing limit, but we will also have to think about how to provide a welfare system to support heavily-indebted people,” he said.
“If business owners want to pay high interest to support their business, they should be able to do that,” said Taira, who ran a vegetable wholesaler before being elected to the Diet.
Gomi, the former FSA commissioner, argues that if regulation is to reviewed, any new system should be designed so as not to increase the number of those with heavy debts.
“This is a good example to show that if there is no self-discipline, that will bring over regulation,” he said. “Back then, both lenders and borrowers had little discipline. As a result, those with self discipline had to suffer.”
Editing by Ian Geoghegan