Reiko Kinoshita, senior vice president of Tokyo Star Bank’s principal finance division, doesn’t mince words. Neither she nor her clients have the time.

“File for bankruptcy; it’s your best bet for getting back on your feet.” Kinoshita urged a distressed company executive in a recent phone conversation. “We will support you and your suppliers.”

Kinoshita is part of a two-person team that provides debtor-in-possession (DIP) loans, packaged for companies under court protection and used mainly as working capital.

Speed is critical. Without a strong assurance from creditors of such support, companies hang on until it’s too late for a second chance. Kinoshita makes her decisions within three days. Other banks take at least a month.

Helped by speedy decision-making, foreign-owned banks like Tokyo Star are making inroads where Japanese banks are unwilling to go. On the way, they are pocketing profits missed by their domestic counterparts.

Kinoshita’s independence wasn’t always a given at Tokyo Sowa Bank, Tokyo Star’s predecessor.

Like its other domestic counterparts, Tokyo Sowa, a second-tier regional bank, used to present mountains of paperwork, confusing and rigid rules of procedure, and multiple seals of approval to be obtained before each and every decision. The bank failed in 1999 and was purchased in 2001 by U.S. investment fund Lone Star Fund.

Employees say that under the new management, more authority is given to those on the ground. Kinoshita need only go to the other half of her division, Shigehiro Yonemori, who has the final say about approving loans of a few hundred million yen.

“Of course, that means my head if these companies we’re supporting don’t get back on their feet,” Yonemori said. Typical Japanese banks, on the other hand, don’t have an easily identifiable person to hold responsible.

In exchange for speed, Tokyo Star charges interest rates slightly higher than other Japanese banks and the government-owned Development Bank of Japan, the main financier of DIP loans.

Tokyo Star’s rates range between 5 percent and 10 percent. DBJ charges a flat 3 percent, and other commercial banks are said to charge somewhere between 4 percent to 5 percent, only a sliver higher than the 2 percent to 3 percent charged to strong and stable companies.

Put another way, commercial banks’ low rates can be seen as missed fees for being slow.

The slowness in decision-making is due in part to the legacy of mergers and rivalries among banks, admitted a Mizuho Bank employee who hailed from one of its predecessors, Fuji Bank.

“I used to spend more time studying loan applications if the person in charge of the loan was from (fellow component bank) Dai-Ichi Kangyo Bank,” he said. “Nothing personal. It takes time to get to know all your subordinates’ quirks.”

Laying blame for a soured loan is meanwhile elusive at large Japanese banks. As many as 10 people may share responsibility. Clients rarely deal with the same loan officer when they negotiate for new lending, and often find themselves dealing with a rookie, he said. Junior loan officers tend to be reluctant to call in a loan out of fear of upsetting a superior who approved the initial loan, and thus banks continue to carry a troubled borrower.

Both Yonemori and Kinoshita, who began their financial careers at Japanese megabanks, shudder when they recall the number of “hanko,” or seals, they had to have affixed to paperwork to get a simple loan approved.

There was always one or two people who wanted a certain detail confirmed, or one more clause added to the loan contract, Kinoshita sighed.

DIP financing is also problematic for banks due to the increased risks associated with lending to firms essentially defaulting on previous loans. But Tokyo Star keeps its doors open, by concentrating decision-making and responsibility on two people.

“I talk to managers and lawyers and then actually go to the factory to see what the company is doing — that’s what lets you know how a company is unique, and whether it can survive on a second try,” said Kinoshita, who is on the road for more than half of her typical week.

Word is out, and the fledgling department, which began business in November, receives at least one call a day from potential clients. At the end of June and three months into the business year, the division reached its 30-company target for the full fiscal year. This well exceeds several yearly deals for a megabank.

Despite its success, or maybe because of it, Tokyo Star is the butt of snide comments by employees at rival banks who compare its lending practices to those of consumer finance companies, which continue to be frowned on for profiting from people in need.

“Tokyo Star and Shinsei (Bank) completely ignore the role of banks to serve the public good,” said a spokesman at a major bank, referring to the two banks’ loan practices. Shinsei is the reincarnation of the formerly nationalized Long-Term Credit Bank of Japan, which failed in 1998 and was bought in 2000 by U.S. private equity fund Ripplewood Holdings LLC.

But Tokyo Star President Todd Budge retorts, “Becoming a strong bank is serving the public good.”

Neither Tokyo Star nor Shinsei charges interest greater than 18 percent. The legal limit for consumer finance companies is 29.2 percent.

And when talking banking, Tokyo Gov. Shintaro Ishihara — dubbed nationalistic and anti-American by the media — praises to the skies U.S. banking practices, at the expense of domestic banks.

“We are going to use U.S.-style management practices,” Ishihara said at a news conference July 10 about a new bank the metro government plans to create to “do what Japanese banks are failing to do.”

The metro government recently moved over 300 billion yen in funds out of Mizuho Bank, the appointed financial institution to handle metro tax revenues and employee salary deposits.

By charging slightly higher interest rates for new services, Tokyo Star and other innovative banks are slowly filling in the gap between loan levels of 2 percent to 3 percent — given to highly rated companies as well as to shaky small and midsize companies — and loans at 15 percent to 29 percent, issued by consumer finance, credit card and lease companies.

Japanese banks can still offer loans at 2 percent to 3 percent interest, regardless of the borrower risk factor, in part because the Bank of Japan keeps interbank rates at essentially zero by pumping excess cash into the banking system.

“This area between 3 percent and 15 percent interest has been a no man’s land,” said Kazumi Kojima, general manager of corporate communications at Shinsei Bank. “As long as that gap remains, banks will find it difficult to make money on their loan portfolios.”

Eiji Hosoya, new chairman of Resona Holdings Inc., partially blames younger loan officers in the past for not talking tough to troubled borrowers because they didn’t want to offend a superior who approved the initial loan. He listed such reluctance as one of the reasons the nation’s fifth-largest banking group recently ended up having to seek a bailout of nearly 2 trillion yen in public funds.

“I believe this to be a common failing within the industry,” he said.

To give credit where it’s due, Japanese banks are trying to raise interest rates to match lending risks, but success has been limited. Strong firms are eager to cut back on debts and not take out new ones; smaller companies have recourse to lower interest rate loans offered by public financial institutions.

Take for instance major lender UFJ Bank. After a nationwide campaign kicked off in February 2002 to get businesses to agree to having their interest rates raised, UFJ saw only a 0.1 percentage point rise in its margin between lending rates and the rate of procuring funds at the end of last March.

As for large zombie firms, sustained by multiple bailouts, raising interest rates on their loans could potentially doom them and significantly damage the lender.

“Raising interest rates is a low priority compared with getting back the principal on a loan,” said former bank employee Futoshi Ueno, analyst at Risk Data Bank Ltd., a consortium originally launched by 21 banks in 2000.

A study released by the BOJ in April showed higher-risk borrowers obtaining funds at 2 percent, even though the BOJ calculated they should be charged 14 percent so that lenders can break even and cover the probability of bankruptcy.

“We have entered the realm of the absurd, when it comes to credit and risk,” said Takehiro Sato, economist and executive director at Morgan Stanley. “Banks continue to be nonprofit organizations whose sole purpose is to provide a safety net against unemployment (by carrying ailing companies).”

But the nation’s banks may have to start getting tougher, as 15 of them are facing a potential administrative order to turn their fiscal 2002 net losses into profits.

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