The nation’s financial services regulator is expected to open a special investigation into the banking industry’s card loan business this month in response to criticism that increased lending is contributing to a rise in personal bankruptcies, sources said.
The Financial Services Agency will look into whether lenders, mainly major banks, abide by the rules set by the Japanese Bankers Association, because the outstanding balance of loans on bank cards continues to rise even after the self-imposed rules were compiled in March.
While consumer finance companies can lend only up to a third of a customers’ annual income, banks can offer card loans regardless of income. Bank card loans let customers borrow money easily through ATMs without putting up collateral.
Well aware of the situation, the JBA imposed rules requiring member banks to assess customers’ borrowing situations and refrain from extending loans that exceed their ability to repay. But some banks have apparently been flouting the rules.
As of the end of June, banks had provided a total of ¥5.68 trillion in card loans, up 8.6 percent from a year ago and the most in 19 years, according to data from the Bank of Japan.
In the meantime, personal bankruptcies in 2016 rose for the first time in 13 years and remain on the rise.
Banks have been focusing on their personal loan businesses to make up for shrinking profits from other businesses hit by the BOJ’s negative interest rate policy.
They can charge interest rates of more than 10 percent on card loan services versus housing loans, which are often below 1 percent and driven by competition.
“We have no choice but (to strengthen the personal loan business) to survive,” an executive at a major bank said.
Regional banks are particularly dependent on the card loan business because they do not have overseas operations to offset weak domestic demand.
The FSA is cautious about tightening regulations and is only urging the banking industry to take appropriate measures. Still, the agency could shift to a tougher stance if it becomes clear that only a few banks are following the association’s rules.
Nobuyuki Hirano, chairman of the association, said at a news conference in June that the banking industry will aim to “evolve (card loan operations) as a sustainable business model.”
Osamu Mikami, a lawyer well-versed in consumer loan issues, said excessive financing is likely contributing to the rise in personal bankruptcies.
According to an investigation by the Japan Federation of Bar Associations, many personal bankruptcies involve bank card loans, including that of a woman in her 40s who obtained a ¥4.33 million loan despite income of only ¥3.56 million a year, and a woman in her 50s with no income who borrowed ¥1.7 million.
Suzuko Iguchi, who heads Yoake no Kai, a group based in Okegawa, Saitama Prefecture, that gives advice to heavily indebted people, said it is hard to believe banks will abide by the association’s rules.
“I don’t think the FSA’s investigation will have any effect. We need a legally binding action,” she said.