The banking industry breathed a sigh of relief Friday as the Cabinet sent the Diet a bill that merely "encourages" lenders to freeze debt repayments for small businesses and home owners until March 2011.

Financial institutions should make every effort to modify their lending conditions when requested by small and medium-size borrowers, according to the bill.

While lenders would not be obliged to freeze repayments, the bill does order them to report how they respond to the lenders' requests to the government. These responses will be disclosed to the public and false reports could result in penalties, the bill says.

In response, the government said it will consider not classifying modified loans as bad loans.

Financial services minister Shizuka Kamei has been advocating financial support measures for small businesses and hinted that banks might be obliged to freeze debt repayments, triggering a storm of protest from the banking industry and even some Cabinet members.

Kamei applauded the contents of his own bill.

"The bill is to be deliberated to help all extremely challenged small companies, shopkeepers and company employees hang on," Kamei said, adding that he hopes a law will be enacted soon.

Kamei also stressed that the government must do more to help small firms.

Yearend boost eyed

Kyodo News

The industry ministry said Friday it will expand financing support for small companies, bracing for the possibility of tighter credit conditions toward year's end.

State-backed Japan Finance Corp. is preparing to ease lending conditions by extending repayment deadlines for small and midsize firms, and the government will offer more compensation in connection with loans by commercial banks to prevent a credit crunch, the Ministry of Economy, Trade and Industry said.