Japan’s $200bn consumer finance industry has never looked pretty, but it has always proved attractive. GE Capital and Citigroup are among those that bought Japanese moneylenders, undeterred by the industry image of loan sharks driving hapless salarymen into bankruptcy and even to suicide. Now regulators are planning their own strong-arm tactics, threatening the industry’s profitability. First came a suspension order on Aiful Corp., the biggest consumer lender, which employed overly aggressive methods for collecting loans. Regulators, backed by ministers, want to lower the 29.2 per cent maximum interest rate charged by moneylenders.
The Lex editors correctly state that it remains unclear how broad government-mandated reforms will be. Standard & Poor’s estimates the damage would be 30% to 50% of the big players’ profits – and Takefuji is a big player – assuming maximum rates are capped at 20% to 23%. What’s more, Wasada University researchers estimate stricter lending rules will deny 10 million Japanese consumers access to loans and jeopardize 0.4% of the country’s GDP growth with the resulting drop in consumption.
The latter looks like scaremongering. But current rates of profitability – Aiful, for example, made operating margins of 27 per cent last year – would be unsustainable without the attractive rewards for risk-taking. High interest charges are coupled with relatively modest delinquency rates of 5 to 7 per cent for the big players. Ultimately, regulators will be guided by expediency. There are perhaps 6,000 consumer finance companies; these sit at the top of the food chain and a surge in bankruptcies would have a ripple effect. Since mainstream banks have not developed unsecured lending in any meaningful way, many borrowers would be shut out – or be forced back into the hands of loan sharks.
I agree that the Japanese regulators won't take action resulting in massive bankruptcies. But make no mistake, there will be uncertainty until the government reveals its reforms. And this uncertainty is one of the headwinds holding back -- and down -- the share prices of Japanese consumer finance companies in general.