Japan's Finance Companies Restructuring for Survival

TOKYO -- Japanese finance companies and other nonbank financial institutions, riddled by bad real estate loans and tarnished by scandals, have announced operating reforms in an effort to put their chaotic houses in order.

But the measures may be too late to save some from bankruptcy, as neither government authorities nor banks seem prepared to bail them out, officials and analysts said.

The nonbank sector includes consumer and corporate finance companies and leasing companies. They rely mostly on bank loans to finance their lending because they do not accept deposits.

Big in Realty Sector

Loans provided by nonbanks account for more than 40% of some $500 billion in loans outstanding to real estate firms.

An official of the Japan Consumer Credit Industry Association said its 770 consumer lending members would set loan guidelines for the first time in its more than 20-year history. The guidelines include setting a limit on loans to each customer, regular reviews of the value of collateral, and restraints on credit extensions in line with requests made by banks.

An official at the Japan Leasing Association said it would also ask its 347 members to improve their credit analysis.

These moves follow restructuring programs announced by several nonbanks after Shizushin Lease Co. filed for court protection from its creditors in April with liabilities totaling $1.96 billion.

Rude Awakening

The failure of Shizushin sent waves through the financial community because it ended the assumption that major nonbanks would never go bankrupt, banking sources said.

Among nonbanks being restructured are Esco Leasing Co., with debts of $2.3 billion; Equion Co., with debts of about $2.4 billion; and Chigin-Seiho Housing Loan Co., with debts of about $10 billion.

In addition, nonbanks were deeply involved in four loan fraud scandals a few months ago, in which suspects forged deposit certificates as collateral to borrow money..

Worried about disruption of the financial system if some nonbanks go bankrupt, the Bank of Japan has asked banks to support their nonbank affiliates, said Yoshio Suzuki, chief counselor of Nomura Research Institute Ltd.

Mr. Suzuki, a former Bank of Japan executive director, said the central bank has been trying to find which bank is responsible for each nonbank and will ask the parents to help affiliates restructure.

But the authorities may not be worried about financial failures of nonbanks that are not affiliated with commercial banks, Mr. Suzuki added.

"The authorities want to protect the stability of the banking system in Japan," he said. "But they will not keep all nonbanks from going bankrupt."

"For nonbank financial institutions already in trouble, paying more attention to credit risks might be too late," said Linda Daquil, analyst at UBS Phillips & Drew International.

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