Harvard Business School last month invited Hiroki Jinnai, president of major Japanese consumer moneylender Promise Co., to field student questions in a forum on the firm’s growth strategy.

HBS’s gesture highlights a gap between domestic and foreign perceptions of the consumer finance industry, which is struggling to improve its negative image on the home front.

“Foreign investors aren’t affected by (the negative image), but by company performance and strategy,” Jinnai, who will step down to become chairman in June, said in an interview. He added that “lecturing (like this) would be unthinkable in Japan.”

On the surface, Japan’s consumer finance firms appear to be among the few profiting amid the prolonged recession. Promise has capitalized on the stagnant economy’s low-interest environment — interest rates on capital procured from financial institutions has fallen below 2 percent while the average interest rate charged in the consumer finance industry hovers at around 24 percent.

For fiscal 2000, which ended March 31, the consolidated business profits of the nation’s No. 3 consumer moneylender jumped 19.6 percent to 359.6 billion yen, with outstanding loans growing 22.4 percent to 1.41 trillion yen. This coincides with the period for which the nation’s major banks are announcing they will report losses after disposing of larger-than-expected bad loans.

But at the same time that Promise’s profits reached these record high levels, a darker side to the success story is emerging.

Automatic Contract Machines owned by the top four consumer finance firms — Takefuji Corp., Acom Co., Promise Co. and Aiful Co. — numbered about 6,400 nationwide as of March, up 10 percent from the previous year.

The expansion coincided with the increase in the number of personal bankruptcies, which grew to an all-time high of 139,280 in fiscal 2000, up 14 percent.

Critics say that ACMs make the application process less rigorous than an application with a teller. ACMs allow consumers to apply and borrow within 30 minutes in the privacy of a smoked-glass room.

The statistics bring to mind the negative image the industry earned for excessive lending during the 1980s that ultimately led to hardball collection tactics.

The industry has never been able to completely shake off this image, and the general public still views the industry with vague suspicion, despite aggressive ad campaigns.

The end result of foreign acclaim and domestic stigma is that 20.1 percent of Promise shareholders were overseas investors, most from the U.S. and Europe, as of the end of March.

What makes the Harvard invitation ironic is that the gravity-defying growth of consumer finance companies is unlikely to continue. Jinnai projected business profits would fall to 10 percent during the current fiscal year.

Younger customers are on the decline, the market faces the prospects of saturation and lower ceilings placed on legal interest rates charged — down from 40 percent to 29.2 percent since June — are putting pressure on the industry, analysts say.

The squeeze has forced smaller consumer finance firms to seek cover in consolidations, while tempting larger ones to align with banks to reach the banks’ higher income customers.

In fiscal 2000, Promise acquired mid-tier finance companies Rich Co., Shinkou Co. and Towa Shoji, supposedly along with the three firms’ higher-risk customers.

The company further set up Mobit, a joint venture with Sanwa Bank and sales finance company Aplus Co. It targets higher-income groups using unsecured loans at relatively low interest rates, from 15 percent to 18 percent.

“I see (the current business environment) as an opportunity to prove the superiority of Promise’s (unsecured loan) database,” he said. “We want to corner more customers by gradually filling in the gap between consumer finance companies and banks.”

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.