Consumer finance companies face multibillion dollar losses and an industry shakeout as stricter loan rules that took effect Friday force them to slow lending, analysts said.
Aiful Corp., Promise Co., Takefuji Corp. and Acom Co., the country's top four consumer lenders, face losses of ¥503 billion over the next two years, according to estimates from Nomura Holdings Inc. The law caps interest rates at 20 percent and prohibits lending to borrowers with consumer debt equal to a third or more of their annual income.
More than 60 percent of Japan's 3,900 registered lenders have yet to comply with a rule requiring them to sign up with credit information firms, meaning they can't make new loans. The caps, meant to protect borrowers, mark the final phase of a four-year crackdown on the industry that's contributed to the closure of thousands of consumer lenders, choking off credit in Asia's largest economy.
"The number of consumer lenders could easily halve," said Shiro Yoshioka, a Tokyo-based analyst at Japaninvest KK, an independent research firm. "Borrowers with nowhere else to go will end up filing for bankruptcy."
About 1,530 lenders had registered with credit data collectors Japan Credit Information Reference Center Corp. and Credit Information Center Corp. as of June 1, according to the two companies.
Banks should lend more to individuals to meet funding needs, as the law takes effect, said deputy financial services minister Kouhei Ohtsuka, speaking in front of a Tokyo train station at a public awareness rally Friday to promote the legislation.
"With any law, there are both positive and negative effects," Ohtsuka said. "The legislation is aimed at stopping people with little income from borrowing too much, and people should understand that."
The Diet passed the consumer credit law in December 2006 following a Supreme Court ruling that lenders had charged excessive interest rates, and gave the companies until now to adapt to the stricter rules.
Almost three-quarters of consumer loans carried interest of more than 20 percent in the year that ended in March 2006, according to the Financial Services Agency.
The crackdown led to a surge in customer claims for interest refunds, triggering billions of dollars in industry losses and a slump in consumer lenders' shares. Moody's Investors Service and Standard & Poor's have cut credit ratings of Takefuji and Aiful to below investment grade, or junk.
Aiful, Japan's fourth-biggest consumer lender by market capitalization, has tumbled 96 percent in Tokyo trading since Dec. 31, 2006, to Thursday, and the company reported ¥675 billion in losses over the past four fiscal years. The Kyoto-based company skirted bankruptcy in December after 65 creditors agreed to delay repayments on ¥279.1 billion in debt.
Shares in Tokyo-based Takefuji lost 94 percent during the period. Takefuji, which has the lowest credit rating from Moody's among the four biggest consumer lenders, has approved less than 10 percent of loan applications since November and is selling assets to repay debt, according to the company.
"Things will only continue to get worse because of the new regulations," according to Ehsan Syed, a Tokyo-based analyst with Fitch Ratings Ltd. "The business model isn't viable anymore."
Takefuji is taking "all possible measures to survive," President Akira Kiyokawa said at a news conference in May. Promise President Ken Kubo last month said this fiscal year will be the company's "severest," adding a loss of "several tens of billions of yen" is likely unavoidable.
Acom President Shigeyoshi Kinoshita, while forecasting a ¥26.2 billion profit this fiscal year, said May 13, "It's difficult to predict what effect the loan cap will have on borrowers' behavior."
The companies' customers typically take out loans to cover living expenses, with refinancing existing debt cited as the second-most common reason, according to a survey conducted by the Japan Financial Services Association in December.
Fifty-three percent of individuals who borrow from the lenders have annual incomes of ¥3 million or less, the survey showed.
Half of those borrowers may be unable to get additional loans from consumer finance companies because of the cap that limits debt to a third of annual income, the lobbying group said.
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