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The Cabinet formalized a bill Tuesday that would lower the ceiling on consumer loan interest rates from 29.2 percent to 20 percent to help reduce heavily indebted consumers.

It would also bar lenders from taking out life insurance policies on borrowers that pay benefits in cases of suicide.

This practice has drawn flak because lenders have allegedly prompted heavy debtors to take this route to pay off their loans.

The government and the ruling coalition aims to pass the bill during the ongoing extraordinary Diet session and cut the ceiling about three years after enactment.

But the Democratic Party of Japan and other opposition parties are calling for reducing the ceiling within a year of the bill’s enactment. The ruling and the opposition camps will address the bill in the current session through mid-December.

The government and ruling bloc initially planned to allow a special high ceiling of 25.5 percent on small short-term loans in the first two years after the ceiling cut to ease its impact on moneylenders.

But the plan drew fire for favoring moneylenders and was subsequently dropped.

At present, moneylenders are required to honor the ceilings of 15 percent to 20 percent, depending on loan amounts, under the Interest Rate Restrictions Law.

These ceilings are 15 percent on 1 million yen or more, 18 percent on less than 1 million yen and 20 percent on less than 100,000 yen.

However, moneylenders are allowed to levy higher rates of up to 29.2 percent on condition they obtain borrowers’ written consent under the Investment Deposit and Interest Rate Law.

A sharp increase in the number of heavily indebted consumers subject to the “gray zone” rates between 20 percent and 29.2 percent has led the government and ruling coalition to consider eliminating the higher ceiling.

The bill would require the ceiling under the Investment Deposit and Interest Rate Law to be cut to 20 percent, leaving the 15 percent to 20 percent ceilings under the Interest Rate Restrictions Law intact.

It would oblige moneylenders to limit loans to one-third of borrowers’ annual income and toughen penalties on loan sharks.

The bill would also prohibit consumer loan firms from taking out life insurance contracts on borrowers that enable the lenders to recover loans in the form of insurance benefits when borrowers commit suicide. The practice has been criticized for prompting lenders to pressure borrowers into committing suicide to repay loans.

According to the Financial Services Agency, the number of people borrowing money from five or more consumer lending firms totals some 2.3 million, or one in every six consumer loan users.

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