October 8, 2009 / 4:32 PM / 10 years ago

Japan plans 3 yr loan moratorium -sources

TOKYO, Oct 8 (Reuters) - Japan’s government plans to push banks to prop up struggling small firms by allowing them to forgo the repayment of loans for up to 3 years, three sources familiar with the latest draft of the plan said.

Opinion in the group was previously split over the length of the moratorium.

The scheme, which was first floated by the controversial new banking minister Shizuka Kamei last month, has helped trigger selling of bank shares on concerns it would lead to an increase in the sector’s bad loans. [ID:nT284678] [ID:nT137543]

A team headed by Kamei’s deputy minister, Kouhei Otsuka, has been hammering out details of the scheme. A draft is set to be presented to Kamei on Friday which will form the basis of a bill to be submitted to parliament as early as this month.

The plan will aim to limit damage to banks’ balance sheets by allowing them not to classify loans to borrowers using the scheme as non-performing, said the sources, who spoke on condition of anonymity because the plan has not been finalised.

It will also offer some form of government guarantee on the repayment of loans to limit the risk of banks, the sources said.

The draft by Otsuka’s team will propose that the debt moratorium allow for a freeze on the repayment of both the principal and interest and for it to last as long as 3 years, the sources said.

The scheme targets small and medium sized companies whose earnings are expected to recover when the economy improves but are currently struggling to raise funds.

It will also target individuals having difficulty paying their mortgage or other loans after losing their jobs or because they are facing some other hardship resulting from the economic downturn.

The scheme will not be legally binding for banks and other financial institutions, which will retain the right to refuse to offer the moratorium to borrowers they deem unfit.

But the government will look to urge lenders to embrace the scheme by having them report to parliament the extent to which they have extended the moratorium terms to their clients, the sources said.

The moratorium has proven of the most controversial proposals by a coalition led by the Democratic Party, which took power in a landslide election in late August, ousting the long-ruling Liberal Democratic Party.

Mitsubishi UFJ Financial Group (8306.T), Mizuho Financial Group (8411.T) and Sumitomo Mitsui Financial Group (8316.T) are Japan’s top 3 lenders. The banking sector .IBNKS.T has fallen 6 percent since Kamei was tapped as banking minister and made public his plans for the scheme. (Reporting by Noriyuki Hirata; editing by Elaine Hardcastle)

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