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Consumer lender-bank tieups mutually beneficial

The Web site for consumer financing firm Mobit Co. solicits new customers for its ATM service with a cartoon.

“Oops! I don’t have money to go out for a drink tonight!” a young businessman groans, peering into his wallet. “No money for a taxi ride home, either.”

A telling line of copy on the Web page reads, “You can feel safe because we are an affiliate of a bank.”

Not only through Web sites like this but with massive advertising campaigns, a new type of consumer lender — each launched jointly by a mega-bank and a major consumer lender — is drawing a bead on young people.

Some experts praise the alliances between banks and consumer lenders — which have expertise in personal credit assessment — as a way for banks to boost profitability and survive global competition.

And for the consumer lenders, tying up with a bank can improve their negative public image and widen their range of borrowers, company executives say.

But critics charge that banks’ involvement in easy borrowing could lead to an increase in the ranks of people suffering under a crushing debt load.

Conventional consumer lenders — despite their strong demand — have never been trusted as much as banks.

Many were charging sky-high interest rates, up to 109.5 percent, until 1983. Currently, the legal cap on interest is 29.2 percent.

They also drew criticism for using threatening measures to collect loans, which sometimes led to suicides.

Unthinkable a decade ago, three of the nation’s four mega-banking groups now have affiliations with major consumer lenders, either through joint ventures or capital tieups.

In July, Sumitomo Mitsui Banking Corp. acquired a 15 percent equity stake in consumer lender Promise Co. and plans to boost it to 20 percent by the end of this year.

SMBC is the second bank partner for Promise, which set up ATM-based consumer lending firm Mobit with UFJ Holdings Inc. in 2000.

Mitsubishi Tokyo Financial Group Inc. in April effectively took Acom Co. under its wing by raising its equity stake to some 15 percent. That followed the 2001 launch of the two firms’ joint venture, Tokyo-Mitsubishi Cash One Ltd.

Users of Mobit and Cash One can receive money through their bank accounts and withdraw money at automated teller machines, most of which are operated by banks. They can borrow up to 3 million yen at interest rates somewhere between 15 percent and 18 percent.

Mizuho Financial Group Inc. is taking a different tack to tap into consumer financing. It said earlier this month it will tie up with credit card company Credit Saison Co.

“If the teaming up succeeds, banks that injected capital to consumer financing firms such as Acom and Promise are expected to see a pickup in group-based gains,” said Yasunobu Doi, a senior analyst for the banking sector at Moody’s Japan K.K., the Japanese unit of the U.S. rating agency.

At this stage, it is unclear how much consumer lenders will contribute to the banks’ group profits. But in any event, banks need to find ways to raise their low profitability, Doi said.

Banks’ profitability — measured by core operating profits divided by risk-adjusted assets — is currently below 1 percent, compared with 7 percent to 8 percent for consumer financing firms, according to Doi.

Risk-averse Japanese banks have long focused on corporate borrowers and housing loan borrowers, and have not tapped much into noncollateral consumer lending.

On the other hand, consumer financing firms have grown rapidly. The top five had 7,801 outlets as of 2003, almost double the number in 1998.

The market size of consumer financing, excluding credit card financing, reached 10.6 trillion yen in 2001, from 4.3 trillion yen in 1991, according to the industry’s latest white paper.

Individual borrowers, except for housing-loan users, generate higher profits than corporate borrowers, because of higher interest rates for noncollateral loans.

“Banks want to acquire consumer financing firms’ knowhow in screening borrowers and collecting money,” said Hideo Kumano, senior economist at Tokyo-based Dai-Ichi Life Research Institute Inc. “They target a middle-risk and middle-return zone” through the new type of consumer lending.

It is middle-risk because target individuals are riskier than collateral-based borrowers and less riskier than conventional consumer-lender users because of more stringent screening.

It is middle-return because the 15 percent to 18 percent interest rates they charge are higher than the 1 percent to 2 percent for blue-chip company lending and lower than 29.2 percent for conventional consumer lending.

SMFG President Yoshifumi Nishikawa acknowledged the bank’s motive for the tieup. “Banks don’t have the ability to judge risks of personal credit correctly,” he said in a June speech.

Nishikawa is also aware of problems unique to consumer lending.

“It is true that the problems of multiple-indebted borrowers and personal bankruptcy cannot be avoided,” he said, adding that banks need to avoid extending loans beyond borrowers’ credit ability.

Some experts said alliances between banks and consumer financing firms represent a setback for efforts to rescue heavily indebted borrowers.

Because banks lack experience in dealing with personal bad debts, they tend to avoid cooperating in rescue plans drawn up by lawyers, said Yuko Mizorogi, a Tokyo attorney specializing in heavy debt problems.

“Banks don’t understand” such rescue plans, which include partial debt waivers, he said.

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