Sarakin On The Retreat

[Mulboyne]

[Big Booger]

How can you loan/finance at 29.2%... and call yourself human?

[kamome]

How can you loan/finance at 29.2%... and call yourself human?

I agree, but unfortunately it's so common in the States. Have you ever had a credit card that charged a 29% APR? To me it's the same thing.

[AssKissinger]

It's all over in America and people are so uneducated about ethical banking practices and even the basic mathematics involved in calculating a percentage that there's no hope of people standing up against this kind of usury here.

[Mulboyne]

How can you loan/finance at 29.2%... and call yourself human?

That rate of 29.2% is an Annualized Percentage Rate (APR). It can be a helpful concept but I'm not convinced that it is the best way of looking at interest costs in social credit cases. Here's a simple example on the Wiki site:

Suppose a loan of $100,000 is paid back in 12 monthly terms of $8771.56. Then at the end of the year a total of $105,258.72 has been paid. The APR is not, however, 5.26% but 10% because the principal amount has been paid back earlier: throughout the year instead of at the end of the year

Similarly, if I lend you $100 and you pay me back $103 six months later, that annualizes to a rate over 10%. For many low income families, a loan taken out to meet an immediate need is often paid back in less than a year, maybe as little as a month or three months. An apparently reasonable total repayment to a lender over a short period can look onerous if calculated as an APR.

I'm not going to defend Japanese consumer lenders. Their collection practices, hidden costs and poor screening were major factors behind the regulatory backlash they now face. GE and Citigroup, both major players in Japan, were happy to let their units operate by local standards rather than attempt to offer the consumer a more honest deal and they now have to face the consequences of that decision.

I will criticize the legislators. If you talk to almost anyone involved in the formulation of the new rules, it is clear that they believe that low income families have no right to be borrowing money. Ironically, the most recent Nobel Peace Prize was awarded to Muhammad Yunus and the Grameen Bank which provides loans to impoverished families in Bangladesh. As their example shows, there is a role for credit in all parts of the economy.

One of the major reasons the consumer finance industry ("non-banks") developed in Japan is that the major banks only ever seemed prepared to lend money to people who already had it. Ordinary borrowers, with no collateral, were driven to the fringes which made their borrowing seem furtive and shameful rather than a normal part of a developed financial system. Most of the sarakin giants have their roots in such fringe operations. Lenders have used this to their advantage to intimidate borrowers sometimes leading them to take out loans from outright illegal lenders which worsens their situation.

It's always possible to come up with examples of some deadbeat with a gambling problem or a young hostess spending her money on brand name goods and host clubs and decide that such individuals should not be borrowing money. More typical reasons for wanting credit, though, are medical bills, replacing consumer durables, weddings etc. The government is surely right to increase consumer protection in this area but while they continue to believe that there is no role for credit for families who they judge should be "living within their means", they reinforce the stigma surrounding consumer loans which is the real root of the problem.

[Mulboyne]

Kyodo: S&P expects 50% fall in consumer loans in Japan on law changes

Standard & Poor's said Thursday Japan's lending law changes in December, including a cut in a ceiling lending rate, may result in a drop of as much as 50 percent in consumer finance companies' outstanding loans. The lending decline could lead to the consumer finance industry's consolidation and affect personal consumption, the U.S. credit rating agency said. The lending law changes that also include lending amount limits are set to take effect within the next three years. Five major Japanese consumer loan companies' operating profits are expected to decline by approximately 60 percent if their outstanding loans fall by about 50 percent, the rating service agency said. But they may be able to remain profitable if they successfully streamline themselves and control their credit risks, it said.

Unsecured consumer loans extended by moneylenders belonging to the Federation of Credit Bureaus of Japan stands at 14.2 trillion yen. If the total falls by 50 percent and if 80 percent of these loans are supposed to be used for consumption, Japan's household consumption may decrease by 2.0 percent to reduce gross domestic product by 1.1 percent, S&P said. But the impact on consumption will depend on the type of borrowers whose access to credit is restricted and the response from other financial institutions, it said.

I'm sure the S&P have a methodology behind their estimate but the truth is that no-one really has a clue what the impact might be. The last cut in the interest rate ceiling prompted a boom in illegal lending and that is what the sarakin are warning will happen again. It's certainly possible, although the police and the courts have been more successful in bringing prosecutions against such lenders and, more importantly, seizing their assets.

There's also a certain amount of gamesmanship here. It may be in the interests of the sarakin to deliberately sacrifice short term profits and restrict lending to bring about the negative outcomes the S&P predicts. This would allow them to highlight the important role they play in the economy and argue for weaker regulation. The risk is that one of them would break ranks or else that other lending institutions step into the breach. This wouldn't be easy because the sarakin have the most comprehensive credit database which constitutes a barrier to entry.

[Mulboyne]

Bloomberg: Japan's Aiful Corp. to Cut 1,900 Jobs, Close Outlets

Aiful Corp., Japan's largest consumer lender, said it will cut about 1,900 jobs and close 1,520 outlets, a month after new laws in the country capped interest rates that non-bank lenders can charge. Aiful will ask its employees, including temporary staff at the group, to resign voluntarily by Sept. 30, and halve its consumer finance branches and outlets, the lender said in a statement filed to the Tokyo Stock Exchange on Jan. 20. Japanese and overseas consumer finance companies are increasingly reorganizing their operations in Japan after legislation was passed on Dec. 13 to lower the maximum rate finance companies can charge to 20 percent, from 29.2 percent. Citigroup Inc., the biggest U.S. bank, said this month it will close about 80 percent of its consumer finance branches in Japan.

"Business circumstances are getting tougher by the revision of the laws," Chief Executive Officer Yoshitaka Fukuda said in the statement. "We will try to make a drastic reform of the cost structure through the reorganization." Aiful also plans to reduce the number of its rooftop signboards from 277 to 183, to cut advertisement costs. The lender intends to cut more than 40 billion yen of operational costs and 7.6 billion yen of annual personnel costs through the reorganization, the statement said. It may post a one-time loss of 5.3 billion yen for the job cuts due to the payment of retirement fees, it said.

[kamome]

Bloomberg: Japan's Aiful Corp. to Cut 1,900 Jobs, Close Outlets

Perhaps the greatest ancillary benefit of the regulatory change: the reduction in the amount of all those eyesore bulletin boards. Those signboards are just as bad as the above-ground electricity lines in ruining the Tokyo landscape.

[Mulboyne]

Perhaps the greatest ancillary benefit of the regulatory change: the reduction in the amount of all those eyesore bulletin boards. Those signboards are just as bad as the above-ground electricity lines in ruining the Tokyo landscape.

That's what I thought too. However, there's a good chance that other advertisers will step into the breach in a lot of locations. The best you can hope for is a greater variety rather than a big reduction.

[Mulboyne]

[kamome]

I suppose these are good developments from the perspective of borrowers who need protection from usurious practices, but when a whole industry goes down in flames as a result of a ruling like this, there is definitely a dark side (unemployment, losses to investors, etc.) Mulb, what's your take - good or bad (or a combo of the two?)

[AssKissinger]

Shit K, it's good. Fuck those corporate cunts and all the corporate cock sucking vampires that work for them.

[Mulboyne]

I'm all in favour of the demystification of personal finance so the removal of hidden fees and clearing up the uncertain status of the "grey zone" is undoubtedly a good thing.

The original legislation was a mess. It was introduced in response to the shokoh loan scandals. Shokoh lenders are like sarakin companies but their customers are usually small businesses rather than individuals, even if is just a one-man operation. They also require that their customers find a guarantor which is not necessary for a sarakin loan. What used to happen is that a troubled borrower would increase his loans but no-one would tell the guarantor since the original agreement he signed gave no limit to his guarantee. When bankruptcies were at their peak, it came to light that guarantors were being asked to find up to ten times the value of the original loan.

Guarantors are often respectable members of society - teachers, civil servants and the like - and they created merry hell when they found themselves on the hook like that. The legislation that was quickly passed to deal with this problem was a Diet Members Bill rather than one drafted by a Ministry and submitted for Diet approval. As such, it was full of holes. For instance, when a bank overcharges interest, it is a civil offence: for a sarakin, it is a criminal offence. It did contain a proviso, however, for a regular review. In the meantime, the law was such a mess that the courts began try to deal with the problem through aggressive interpretation. Activist judges are anathema to politicians no matter which country you look at and so the current review was given the broadest possible brief.

I'm not convinced that a rate cap is ever a good way to control this business. In a properly competitive industry, rates should reflect credit risk. Rates either stay high because demand outstrips supply or else the market is not competitive. It is a bit of both in Japan. The greatest barrier to entry for any lender is not knowing the true debt position of a borrower. The sarakin combine their records so they can see at a glance whether an individual has loans from another member company. Commercial banks like Mizuho and Mitsubishi cannot see this data so if they tried to expand into the unsecured consumer lending market, they could end up lending to all the worst borrowers and suffer crippling default rates.

One solution, then, is to combine all the various personal credit databases. The problem here is protection of privacy. More particularly, one of the databases is regularly used by criminal gangs. Combine them all and the gangs get to see everything which clearly isn't acceptable.

Something needed to be done about the sarakin but I can't for the life of me see what endgame the legislators have in mind. Perhaps they believe that the sarakin are bluffing and they will still extend loans but make a lot less money. Everyone always did seem a bit embarrassed that some of the richest men in Japan ran consumer finance companies. Perhaps they wish to destroy the sarakin so the banks can come into the market? If so, no-one appears to have told the banks to gear up and the transition would probably take years. Maybe they think that no-one should be making these loans. As I mentioned before, those debating the issue often seemed to see many sarakin borrowers as feckless ne'er do wells.

The issue of the sarakin has often come up in connection with discussion of kakusa shakai. Japan has woken up to the idea that society has got a lot more unequal of late. One side effect of this is that lawyers groups are now very active in highlighting areas where weaker members of society appear to be exploited. This is one of the factors behind the new legislation against the sarakin. It's ironic because the root problem in Japanese personal finance is the unequal access to credit. These new protections risk throwing the baby out with the bathwater and leaving the poorest in the population with no credit and no chance to close the growing gap.

[Mulboyne]

Market Watch: GE latest casualty of Japan consumer finance crackdown

GE Consumer Finance Co. said Thursday it will scale back its consumer finance business in Japan by closing branches and cutting staff, the latest casualty of a new Japanese law that caps interest rates on consumer loans. The move marks another convulsion in Japan's consumer finance industry, which has been clobbered by the stricter lending rules. The harsher business environment has already prompted Citigroup to close 80% of its consumer finance branches in Japan at a cost of $415 million, and has triggered heavy losses at virtually every Japanese consumer finance firm. The General Electric Co. unit said it remains committed to Japan's consumer finance market for the long term but plans to revamp its personal loan operations, which operate under the brand name "Lake," to reduce costs and cope with the new legal regime. A GE spokeswoman declined to comment on the cost of the restructuring. "We will build a business model that is commensurate with the new business climate and helps us improve customer services," Akihiko Kumagai, president and chief executive of GE Consumer Finance Japan, said in the statement.

Under the overhaul, it will shutter 73 of its 115 manned branches and about 200 of its 1,342 unmanned branches this year. It will also close 48 local collection offices and create expanded call centers to handle collections.
It will also introduce an early-retirement program for staff, seeking to reduce its head count by 300 to 400 in the second quarter of the year, mostly in its sales and local collection operations. GE Consumer Finance Japan has about 2,600 full-time employees. The retrenchment marks a setback for GE in Japan, where it first entered the finance industry in 1994 when it bought a consumer finance business from Japanese ball bearing maker Minebea Co. But the damage appears limited to its personal loan business. The GE spokeswoman said there are no plans now to restructure its Japanese mortgage loan or credit card businesses. It also highlights continued fallout from Japan's new lending rules.

On Tuesday, Orient Corp., a major consumer credit company, said it expects to suffer a massive net loss of Y457.9 billion for the fiscal year ending March - causing it to fall into negative net worth - due to the cost of paying back interest on high-interest loans it made that took advantage of a "gray" area in Japan's lending laws. Under previous regulations, lenders were able to charge borrowers "gray zone" rates in a gap between a 29.2% maximum interest rate stipulated in the Investment Law and a 15%-20% ceiling set under the Law Concerning the Restriction of Interest. But mounting public criticism of the industry's lending - and collection - practices led the government to pass stringent legislation in December capping maximum interest rates at 20% and loans to a third of borrowers' annual salaries. Under the new regime, consumer finance firms have been setting aside reserves in case they are forced to repay interest on loans they made at such "gray zone" rates. That has led to a flood of red ink from consumer finance firms. Takefuji Corp. expects to post a net loss of Y333.8 billion for this fiscal year, while Acom Co. forecasts a net loss of Y257.3 billion for the same period.Analysts say there is concern a decline in lending by consumer finance firms could cause a credit crunch, harming Japan's economic recovery, especially as consumer spending still remains weak amid lackluster growth in wages.

Also:

Bloomberg: Aiful, Acom Reject More Borrowers to Cut Defaults

Aiful Corp., Japan's biggest consumer lender, and its two closest rivals rejected more than half of loan applicants in January as they seek to trim costs by weeding out borrowers who may default. Aiful cut approvals by half, granting unsecured personal loans to 36 percent of applicants in January, compared with 72 percent in February 2006, according to data on its Web site. Acom Co., the second-biggest lender, cut approvals by a third to 47 percent in the same period. Promise Co. ratified 40 percent. Bad-loan costs have mounted in the $170 billion consumer finance industry since Japan's courts last year opened the door for borrowers to claim refunds of interest and regulators reined in collection tactics. The three biggest lenders forecast a combined $5 billion loss in the year to March 31 and may struggle to return to profit as a new law caps their charges at the same level as banks...more...

[kamome]

I can understand the move to restrict unsecured loans but are they also cutting secured loans as well? I'm not well-informed about the consumer finance business, but it looks like that is purely an unsecured loan business (unless the lenders can take the Japanese equivalent of a PMSI when the loan proceeds are being used to finance the purchase of goods).

[Mulboyne]

I can understand the move to restrict unsecured loans but are they also cutting secured loans as well? I'm not well-informed about the consumer finance business, but it looks like that is purely an unsecured loan business

Sarakin extend unsecured loans. Shokoh loans require a guarantor but the consumer non-bank business is virtually all unsecured.

[Mulboyne]

It's interesting that as the sarakin cut back on their loans to riskier borrowers, the sub-prime mortgage market in the US is in meltdown.

They are different markets but the regulators will be congratulating themselves.

[kamome]

It's interesting that as the sarakin cut back on their loans to riskier borrowers, the sub-prime mortgage market in the US is in meltdown.

They are different markets but the regulators will be congratulating themselves.

I picked up on that too, but how would the sub-prime lenders in the US be affected by Tokyo regulations?

[Mulboyne]

I picked up on that too, but how would the sub-prime lenders in the US be affected by Tokyo regulations?

Not at all. Many of the members of the regulatory committees wanted to clamp down on the sarakin because they believe that debt is evil. Watching US lenders in trouble will just reassure them that extending credit causes trouble. Their idea of "sub-prime", though, is anyone who doesn't already have the money they want to borrow. There is no sub-prime mortgage market in Japan although lending by the jusen companies took little account of credit quality so a lot of it was effectively sub-prime even at the point of the loan.

[Mulboyne]

...Ironically, the most recent Nobel Peace Prize was awarded to Muhammad Yunus and the Grameen Bank which provides loans to impoverished families in Bangladesh. As their example shows, there is a role for credit in all parts of the economy...

Asahi: FSA to exempt NPO banks from moneylending revision

The Financial Services Agency decided it would be a good idea to differentiate between loan sharks and NPO banks similar to the one run by a Nobel Peace Prize winner....NPO banks receive funding from citizens and provide loans to community-based organizations working on welfare, environmental and other issues...The interest in microcredit has increased since Muhammad Yunus of Bangladesh and his Grameen Bank won the 2006 Nobel Peace Prize. The Grameen Bank lends money without collateral mainly to women in agricultural communities.

[Mulboyne]

This is a fairly heavy penalty. I wouldn't be surprised to see a "for sale" sign on Sanwa Finance soon.

Asahi: Sanwa Finance operations suspended

The Financial Services Agency on Wednesday ordered Sanwa Finance Inc. to suspend operations at all of its 415 outlets nationwide for overly aggressive debt-collection tactics and other violations, officials said. The order imposes the longest business suspension on a major or medium-sized loan company for such infractions, ranging from 43 to 66 days starting on April 23, the officials said. Sanwa Finance's debt-collectors repeatedly harassed borrowers with phone calls and other demands. Records concerning payments on interest were hidden. And the company's manual actually encouraged such actions, according to the FSA. "Many violations have been made at the initiative of the head office, and there are serious problems involving the management's oversight functions," an FSA official said. Sanwa Finance, an unlisted company based in Tokyo, is believed to be the 11th largest consumer loan company in Japan, with an outstanding balance totaling about 146 billion yen at the end of 2006...more...

[Mulboyne]

[Mulboyne]

Euro2Day: Japan's lenders (Financial Times Lex Column)

Japan's $200bn consumer finance industry received a fresh blow on Tuesday when Standard & Poor's put Aiful on credit watch with negative implications. Not before time. Aiful, one of the top four consumer lenders, lost a net $3.4bn last year and reckons revenues – which fell 9 per cent – will decline a further 18 per cent this year.

Several changes have thrown the industry into turmoil. New legislation will slash the maximum lending rate from 29 per cent to 20 per cent. Meantime, a court ruling paved the way for borrowers who paid interest of 20-29 per cent to claim refunds. That forced consumer finance companies to increase provisioning and resulted in a sea of red ink: the top four lenders, including Aiful, lost a net $14bn in aggregate in the year to end March.

Results announcements are littered with signals that the pain will continue. Acom has taken the pre-emptive step of cutting its maximum rate to 18 per cent from next month. This will cut a swathe of riskier borrowers out of the market – or into the arms of less exacting lenders. The cull of higher-risk borrowers means companies are lending far less. Acom's approval rate, or the number of loan applications accepted, fell from 68 per cent in the fiscal year 2005 to 55 per cent last year; by June it estimates it will be around 35 per cent. The industry's sources of funding are changing, too. Regional and trust banks are scaling back while bond investors are taking their place. Commercial paper and bonds now account for 44.3 per cent of Aiful's funding, up from 39.8 per cent two years earlier. This paper is widely held, both through straight US dollar-denominated bonds and collateralised debt obligations.

The slim credit spreads on offer – in part a reflection of the investment grade ratings awarded by optimistic ratings agencies – do not compensate for the risks.

[Mulboyne]

I'd like to get this lawyer's business card.

[kamome]

I'd like to get this lawyer's business card.

I'd just like to have his job!

[Greji]

:D

I'd just like to have his job!

Would you mean Bird? You thinking of finally getting off welfare?

[kamome]

Would you mean Bird? You thinking of finally getting off welfare?

If I could keep both, I would!

[Mulboyne]

[Mulboyne]

Kyodo via Japan Today: Top court rules in favor of consumer-loan borrowers over interest

The Supreme Court ruled Friday that a consumer loan company must pay interest when it refunds excessive interest money to borrowers. The ruling is expected to further increase costs for consumer loan companies that face borrowers' pending lawsuits for refund of interest payments beyond the 15-20 percent ceiling under the Interest Limitation Law.

[Mulboyne]