A transition period of about five years in introducing a lowered, single interest-rate ceiling for consumer loans is necessary to meet potential demands from customers who want to borrow money for a short period, Financial Services Agency chief Yuji Yamamoto reckons.

“The public may find it easier to understand if there is no transition period, but we need to make a decision based on reality,” Yamamoto said in an interview this week.

The ruling Liberal Democratic Party decided earlier this month on a five-year transition period before imposing an interest rate cap of 20 percent. The cap will be lowered to 25.5 percent in the final two years of that period from the current 29.2 percent.

Yamamoto, who was a key figure in Prime Minister Shinzo Abe’s LDP presidential campaign, said the FSA plans to draft a bill based on the LDP proposal in the Diet session that opened Friday.

Under the Interest Rate Restrictions Law, consumer loan companies can now charge no more than 15 percent to 20 percent interest, depending on the size of the loan. But under the Investment Deposit and Interest Rate Law, they can charge up to 29.2 percent if borrowers agree in writing.

Borrowers unable to repay loans with interest rates up to 20 percent tend to acquire other loans at higher rates. As a result, many debtors end up borrowing from several firms, accumulating a mountain of debt.

But during the course of discussions, the FSA proposed a nine-year transition period, prompting Masazumi Gotoda to resign as FSA parliamentary secretary in protest.

Gotoda, who opposed any transition period, claimed the FSA proposal will only force debtors to suffer for a longer period under the 29.2 percent rate.

Yamamoto, however, pointed out that many consumers may have a hard time getting loans because many lenders will probably be forced to close if the interest rate is lowered, eating into their profits.

“Consumer loan companies will only lend money to customers who can repay the debt,” said Yamamoto, an LDP member of the House of Representative elected from the No. 3 district of Kochi Prefecture.

People who fail credit screening but need to borrow money for a short period will have to turn to loan sharks charging usury rates, he said, adding that the FSA needs to work with the National Police Agency to prevent this.

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