A tug of war is under way over a government plan to review the upper limit on interest rates that consumer finance firms and other nonbank moneylenders can levy.
Groups of lawyers representing people who owe money to consumer loan firms are demanding an upper limit that is lower than the current 29.2 percent a year. The consumer loan industry is countering with demands for a higher ceiling, or at that the status quo be kept in place.
“If the upper limit is cut again, we will not be able to lend money to people who desperately need to borrow,” a consumer credit industry official said.
The current limit was imposed June 1, 2000, six months after the Diet passed legislation designed to lower the limit and curb nonbanks’ high-handed methods of collecting loans.
The legislation was devised following a public outcry over hostile collection techniques used by some “shoko” nonbanks, which triggered suicides among borrowers and third-party individuals who guaranteed the loans.
Shoko loans are typically extended to small businesses without collateral as long as they are guaranteed by a third party, mostly by individuals.
In 1999, the Diet summoned the heads of two shoko lenders whose tactics had drawn flak to give sworn testimony.
Legislators questioned Kazuo Matsuda, then president of Nichiei Co., and Kenshin Oshima, president of Shohkoh Fund and Co., on allegations that their companies instructed subordinates to use intimidation to collect loans.
Since 1999, police have arrested six serving and former employees of the two nonbanks. Courts have since found the six guilty of violating either the Criminal Code or the Money-lending Control Law.
The resulting amendment to the Investment Deposit Law reduced the limit to 29.2 percent from 40.004 percent. The law is binding and provides punitive clauses for offenders.
But a clause in the law sowed the seeds of the current tug of war by mandating that “a necessary review should be conducted in three years after the amendment takes effect by taking into account the state of business of moneylenders.”
That suggests small shoko lenders may face potential business difficulties due to the cut in the binding limit.
A separate law governing interest levels — the Interest Rate Control Law — stipulates different upper limits. Those limits remain unchanged at between 15 percent and 20 percent.
Since this separate law has no punitive clauses, the “gray zone” gap, or the range between the upper limits of the two laws, remains.
“The Interest Rate Control Law mandates upper limits of 20 percent per annum for loans whose principal is less than 100,000 yen, 18 percent for loans whose principal is between 100,000 yen and less than 1 million yen, and 15 percent for loans of 1 million yen or over,” a lawyer said.
“What is problematic is the existence of the gray zone between these upper limits and the upper limit stipulated by the Interest Deposit Law” of 29.2 percent, the lawyer said.
The lawyer, who has represented heavily indebted people, said the Diet should cut the upper limit of the Interest Deposit Law to 20 percent, using the opportunity of an imminent review of the upper limit allowed under the law.
Major consumer finance companies, including Takefuji Corp., Promise Co. and Acom Co., are vying for creditworthy customers. They offer “preferential” interest rates to customers with high repayment potential. The competition has pushed down the average interest rate levied by these lenders to some 25 percent.
Since the major lenders cut their operating expenses, including wages and loan-loss charges, to an estimated 15 percent of their loan balances, they should be able to easily manage a cut to the upper limit of the Interest Deposit Law, industry observers said.
At present, the balance of consumer loans stands at more than 9 trillion yen.
The balance of shoko loans extended by a combined 3,588 shoko moneylenders amounts to roughly 27 trillion yen.
“There are two camps of consumer loan companies,” said Daisuke Higuchi, a researcher at Waseda University. “One consists of a few major firms with efficient management methods that deal with people with relatively high repayment abilities.
“The other camp comprises a much larger number of small and midsize lending firms that deal with people with weak repayment abilities and high loan-loss risks.”
An industry body grouping such lenders opposes a further cut in the Interest Deposit Law’s upper limit, saying the 2000 cut lowered the lenders’ profitability and ability to cover loan losses.
As a result, many smaller consumer finance firms have come to refrain from lending money to customers with low repayment abilities, the industry body said.
“If the Diet legislates a further cut in the upper limit,” an industry body official said, “people whose loan requests will be rejected by the smaller lenders will come to count on black-market financiers (loan sharks), thereby worsening the situation.”
There have been reports of such loan sharks charging exorbitant interest rates, such as 1,825 percent and 1,460 percent per year. The 1,825 percent means interest of 50 percent every 10 days.
The National Conference of Anti-Black-Market Financier Measures, a group of lawyers led by Kenji Utsunomiya, has filed criminal complaints against 2,600 identified loan sharks with the Metropolitan Police Department and other prefectural police forces.
The number of loan sharks operating without having been identified remains unknown.
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