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Troubled Aiful Corp. reported Tuesday that its net profit for fiscal 2005 dropped 13.1 percent to 65.827 billion yen on a consolidated basis due to a rise in customer demands that excess interest on loans be returned.

The outlook is even grimmer for the major consumer lender; it was ordered by the Financial Services Agency on April 14 to suspend some business operations at its approximately 1,900 outlets nationwide for three to 25 days for illegal loan collection practices.

Aiful expects group net profit to decline 20.2 percent for the current business year to 52.54 billion yen due to the FSA punishment.

After the FSA announced the suspension order, the number of new Aiful customers had dropped 60 percent by the end of April on a year-on-year basis, and the downward trend has continued into May, Aiful Corp. President Yoshitaka Fukuda told a news conference at the Tokyo Stock Exchange.

Even more of a problem is the decision by many banks to suspend their tieup arrangements with Aiful for fear the connections will taint them.

About 40 percent of the 82 banks Aiful deals with have suspended all links and the other 60 percent have stopped cooperating in acquiring new customers, according to Fukuda.

Among regional banks, Toyama-based Hokuriku Bank late last month cut its arrangement with Aiful to provide unsecured loans and removed advertising for the loans from all of its branches.

Tohoku Bank in Iwate Prefecture, Chugoku Bank in Okayama Prefecture, Kiyo Bank in Wakayama, Fukuoka Bank and Sapporo Bank have also discontinued their collaborations with Aiful.

“Our brand image has undoubtedly been tarnished, and (whether we can restore it) depends on the measures” to be implemented to deal with the situation, Fukuda said, adding his company will work to improve its public image and come up with a new business model.

“We cannot yet predict” what the result of the current situation will be, he said.

Fukuda said the loss of Aiful’s bank tieups will have a limited impact on its earnings.

Some experts disagree. They have predicted the scandal will cause banks to review their relationships not only with Aiful but with all consumer loan firms, which may trigger a realignment in the consumer-lending sector.

“The scandal will cause huge damage not only to Aiful but also other consumer loan firms,” said Akio Makabe, an economics professor at Shinshu University.

“A bank holds a public position, and banks fear that their images will be hurt should illegal collecting by the consumer loan firms they deal with start surfacing,” Makabe said.

This concern will prompt major banks in particular to reconsider their tieups with consumer loan firms, Makabe said, adding that banks will start trying to do the lending on their own instead of using tieups.

After the economic bubble burst, banks were quick to enter the consumer lending business, using deals with consumer loan firms to shore up their profit bases.

They now are finding they need to expand consumer-lending business as more companies are raising capital on the stock market and not borrowing from the banks, and interest rates continue to stay extremely low, Makabe said.

Banks have failed to attract many borrowers, who find it easier to get money from consumer loan firms at much higher interest rates, but that could change, he said.

“Banks already are offering credit-card loans at much lower lending rates than consumer loan firms but have failed to expand their customer base,” Makabe said.

“But now that more people may come to have negative images of consumer loan firms, banks should be able to utilize their public position and the people’s confidence to make active inroads into consumer lending by meeting consumer demands.”

Some consumer loan firms, by contrast, may fall by the wayside while others are forced to merge with rivals or other financial institutions if their customers go elsewhere after the “gray zone” — the high ceiling on consumer loan interest rates — disappears, Makabe said.

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