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Sunday, Aug. 29, 2010

BIG IN JAPAN

Tightened credit rules threaten to spawn 'loan refugees'


Japan may be in the midst of a silent epidemic of kinketsu-byo ("lack of money disease"). The source of the infection is a new statute that bans many borrowers from obtaining unsecured loans.

While the full repercussions of the revised Money Lending Business Law (MLBL), which was passed in 2006 but went into force on June 18, are still unclear, the law's impact appears likely to affect discretionary spending by hundreds of thousands, if not millions, of people who are no longer eligible to borrow. It is feared that many, desperate for a short-term infusion of cash, will turn to illegal loan sharks.

Two days before the new law took effect, the Sankei newspaper (June 16) had reported "chaos" at ATMs, with customers besieging sarakin (consumer loan) companies. Many borrowers, a good deal of whom appeared to be housewives, were caught unaware of the impending law. This was due, in many cases, to the sarakin firms' inability to notify them about the new law by mail or telephone, in some cases because the borrowers had taken out loans without the knowledge of their spouses.

Learning only at the eleventh hour, the borrowers rushed to obtain a last infusion of cash, only to find the credit faucets had been turned off.

"All we could do was apologize to them," a harried staff member of Promise, one of the big four loan companies, was quoted as saying.

By Aug. 17, the first data arrived showing that the law was indeed having a pronounced effect on borrowing. The Japan Financial Services Association announced the year-on amount of loans to consumers by its member companies during June fell by 32.6 percent over 2009, to ¥331.394 billion — and the one-month drop in loans issued from May, 18.6 percent, was the highest ever recorded.

Sources in the financial industry estimate as many as half the estimated 15 million customers of these companies have already maxed out on their loan limits — creating as many as 7.5 million "loan refugees" who will be ineligible for further credit.

Sarakin, an abbreviation of sarariman kinyu (credit for wage earners), offer small unsecured (i.e., uncollateralized) loans with minimal red tape. They first appeared around 1930, but did not become widely established until the period of high economic growth in the 1970s.

The aggressive and heavy-handed collection tactics unleashed on the unfortunates who fell behind in their payments spawned the term sarakin jigoku (loan-shark hell). The system also created great wealth for a few major players: In 2005, three of the five wealthiest individuals in Japan were said to be principals of sarakin companies.

On the surface, the new law appears to protect consumers, reducing the highest allowable interest from 29.2 percent per annum to between 15 and 20 percent in three increments depending on the loan amount.

But another stipulation of the MLBL has created a credit squeeze. Lenders are prohibited from extending new loans when total debts exceed one-third of annual income.

The new law also prohibits wives from borrowing against their husband's income without his written agreement.

"It's believed that 38 percent of the housewives who take out loans conceal it from their husbands," a loan consultant named Mikio Kobayashi told the tabloid Nikkan Gendai (May 19). "The new law is likely to drive these women to illegal moneylenders who will charge much higher rates, and they may find themselves in desperate straits just to pay the interest."

According to a survey conducted by the Japan Financial Services Association at the end of 2008, consumers' four main reasons for taking out such loans were to pay for living costs (34.3 percent); to pay back other loans (20.4 percent); to supplement their businesses (10.2 percent); and to purchase goods (2.9 percent).

With workers' wage increases and bonuses on hold, the new law puts the squeeze on households at the worst possible time. News site President Reuters (June 17) quoted a think tank at Waseda University that expects the shortfall may negatively impact Japan's 2010 GDP by as much as 0.237 percent. Some estimates fear a cash shortfall would hit leisure and other outlays, causing the GDP to drop by ¥1 trillion.

In a June 20 editorial, the Matsue City-based San-in Chuo Shimpo newspaper showed sympathy for those who face severe financial straits but don't meet the stricter credit check criteria, remarking, "Providing relief to disadvantaged people is an important political issue, and the present administration needs to work at providing a safety net."

Meanwhile the business magazine Weekly Diamond (July 31) predicted that at the present rates of attrition, the big four sarakin companies — Acom, Takefuji, Promise and Aiful — would be out of business within two and a half to three years. While few are likely to mourn their demise, the question remains: Where will people turn for an infusion of quick cash?

When the revised law was enacted in 2006, no one could have foreseen the "Lehman Shock" and ensuing collateral damage, such as cutbacks in hiring, wage freezes and reduced bonuses. Despite the law's good intentions, it has been hit by the law of unintended consequences — and low-income households will be paying a high price.



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