Japanese business fear credit squeeze

SMEs concerned at limit on borrowing
Loan approvals fall as bankruptcies rise
by Michiyo Nakamoto in tokyo

Japanese small businesses could faze a credit crunch AS a result of legislation that will lower the maximum interest rate on consumer loans but restrict the total amout people can borrow, a senior member of the ruling party warned yesterday.

“There is considerable risk”of a credit crunch, Yositake Masuhara, chairman ofthe money-lending system subcommittee of the Liberal Democratic party’s research commission on the finance and banking system, said in an interview with the Financial Times. “We are watching the situation very carefully”

Mr Masuhara was instrumental in passing the new money-lending law, which will reduce the maximum interest rate on consumer loans from 29.2 per cent to 20 per cent and
restrict total lending to one-third of a borrower’s annual income.

The decision to clamp down on the industry was made in spite of concerns among some politicians and economists that the large cut in the maximum lending rate could spur a sharp contraction in the money-lending industry while restrictions on loan sizes could hurt many small businesses. The change comes admit widespread resentment that the benefits of Japan’s longest growth period since the second world war were not being evenly spread. In particular, the stricter lending rules are expected to affect weaker members of society, including owner of small businesses, who often rely on moneylenders. There is also concern that borrowers seeking greater credit could be driven to loan sharkd.
Robert Feldman, chief economist at Morgan Stanley in Tokyo, said the impact of a credit squeeze was likely to be felt particularly among sart-ups, many of which are unable to borrow from banks and rely on consumer finance companies for their initial funds.
Mr.Masuhara said many small and medium-sized consumer finance companies were pulling out of the market, “which means they are not lending new money”.

The larger lenders, which have adopted stricter credit assessment rules ahead of the implementation of the law by the end of 2009, have also started turning away borrowers.

The approval ratio for new loans has dropped sharply at some leading consumer finance groups, from more than 64 per cent last May to 32 per cent last month at Acom, and 57 per cent to 37 per cent in the same period at Aiful.

Data from Teikoku Databank, Japan’s largest corporate credit research company, show that the number of bankruptcies among samll and medium-sized companies rose by 52 per cent in May compared with a year earlier, while the number of individual proprietors who went bankrupt doubled in May, after having risen strongly each month since last September.

A Teikoku Databank official said that, while it was difficult to attribute the higher bankruptcies directly to the new money-lending rules, “from now on the impact of the credit crunch will be stronger, there is no question about that”.

Mr.Masuhara said that, while there were no signs yet of full-blown credit crunch, there might be a need to review the law if the situation got worse.