Summary
A committee of policy makers assigned to the Financial Services Agency, Consumer Affairs Ministry and Ministry of Justice will convene this month to assess the impact of Revisions to the Money Lending Business Law on the consumer credit industry in Japan. The committee will either recommend to proceed with full implementation of interest rate harmonization and quantitative lending restrictions or propose new legislation to alleviate the burden on the industry.
Analysis
The consumer finance industry fought hard for a provision in the Revised Money Lending Business Law (MLBL) that requires the government to conduct an impact assessment prior to full implementation of provisions mandated by June 2010. Industry plan to appeal progress made in cooperation with self-regulatory bodies such as the Japan Financial Services Association (J-FSA) and the Japan Credit Reference Information Center Corp in making arguments against the implementation of quantitative lending caps. Any such change in policy, however, would require swift enactment of new legislation during next year's ordinary session of parliament.
Without a doubt, the industry has made tremendous progress reigning in excessive lending. Tighter licensing requirements have reduced the number of registered money lenders by over 50% from 11,832 in March 2006 to 5,065 in March 2009. Over the same period, the aggregate outstanding balance of unsecured consumer loans has fallen from 11.7 trillion yen to 7.3 trillion yen and the average interest rate applicable to such loans has fallen from 24.3% at 20.9%. This year, for the first time more than 50% of new unsecured loans have been extended at interest rates below the 18% legal maximum for balances of JPY 100,000 to JPY 1M.
The industry has made progress on structural reforms as well. The Japan Money Lenders association was dissolved and replaced by a new self-regulatory body, the J-FSA. Meanwhile, the nation's largest credit bureau reorganized under the supervision of a former FSA official, invested JPY 5 billion yen in the a new STARS-II database and merged with the nation's third largest credit bureau. The new database, a state-of-the-art system developed by IBM Japan to address all of the requirements for a designated credit bureau under the MLBL, went into full-scale operation in June.
Over the past three years, Japan's four largest consumer finance companies have collectively written off over 3 trillion yen in bad debts and paid out over 1 trillion yen in refunds of overpaid interest while the estimated number of overindebted individuals has fallen from over 2 million to just over 750,000. Similarly, personal bankruptcies have declined from a peak of 242,377 to just 129,508 and consumer complaints pertaining to moneylending have fallen from 77,443 to 8,711 over the six year period from April 2002 to March 2008.
In spite of such progress, recent survey of 106,000 consumers commissioned by the J-FSA indicates that nearly 60% are unaware of the new restrictions scheduled for implementation next June and that just over 50% would not qualify for new loans if the quantitative lending restrictions went into effect today. Industry executives hope the strong progress made to date combined with the dramatic impact that implementation of quantitative lending restrictions would have on the supply of consumer credit will lead the newly elected government to enact new legislation forestalling an imminent crisis.
Yet, the most the industry can hope for is probably a delay in implementation or a raise in the ceiling of the quantitative lending cap. The fact that so much progress has already been made with relatively so little pain (from the regulator's perspective, anyway) only encourages policy makers to keep pushing forward. Conversely, backing away from a lowering of the criminal usury ceiling would erase much of the progress made to date whereas eliminating the quantitative lending restriction entirely would diminish investments already made to upgrade the country's credit reporting infrastructure.
Expect consumer finance companies Aiful and Takefuji to continue to struggle while Acom and Promise Corporation continue to benefit from their status as affiliates of major banking groups. Consumer credit companies such as Credit Saison, Toyota Finance and MUFJ Nicos should ultimately emerge stronger as the dust settles on reform of the moneylending industry over the next 12 months.
