Japan’s efforts to clean up the banking system will enter a new phase this spring when the government sets up a new body to help revive overly indebted but potentially viable borrowers. The “industrial revitalization corporation” will buy doubtful loans from creditor banks (excluding main creditor banks) and, working in tandem with the main lenders, support the reconstruction efforts of those borrowers.
The new body is different from the existing Resolution and Collection Corporation, or RCC, which buys bad loans from potentially nonviable borrowers. Loans will be purchased anew on the premise that borrowers will be able to pay off their debts in a reasonable period of time through restructuring, such as cutting off unprofitable operations. These borrowers are currently getting relief from creditor banks in the form of debt rollovers and such.
The central question for the new institution is whether it will be able to achieve its stated objective of promoting industrial readjustment through debt cleanup. The answer depends, first and foremost, on whether banks are willing to sell loans to it. The creation of a new loan-purchasing entity, even though it has the blessing of the government, is in itself no assurance that the banks will sell willingly. Experience suggests they are not likely to do so unless reasonable inducements are offered.
A year ago the government launched a corporation to buy shares held by banks, but the program has proved a dud because banks have been reluctant to sell shares — for reasons that make sense, such as low buying prices. The RCC has suffered a similar fate because banks have shied away from it. The lesson to be drawn is that nothing can succeed unless banks are brought fully on board.
The first thing to do is to induce banks to sell loans to the new body. For that, loan purchases must be an integral part of banks’ own efforts to write off bad debts. In other words, banks and borrowers (aside from those doomed to failure) must be able to make joint efforts toward revival much as if they were two wheels of the same cart. The task for the new institution is to direct these efforts in an integrated manner.
However, the basic requirement remains the same: Banks must provide the main thrust of reform. They cannot escape criticism that the government has been obliged to create one entity after another to accelerate reform because they have been unwilling, even unable, to fix the bad-debt problem on their own. The only way to counter that criticism is to take more positive action and produce more tangible results as quickly as possible. As a first step, they should make better use of the supporting schemes already in place.
There also questions about the effectiveness of the new body that will start this spring. Still, banks should not be deterred from making positive use of it. What flaws exist should be, and can be, corrected along the way.
One question is whether an “industrial revitalization committee” of private specialists — which will decide whether borrowers are eligible for financial support — will be able to exclude political influence.
Another question is the prices at which loans will be purchased. The guidelines say only that they will be purchased at “appropriate market prices.” The RCC normally buys at market value, which now equals only about 10 percent of the book value. That is why banks have been reluctant to sell. “Appropriate” is taken to mean a level higher than market value. However, a more objective standard is needed to ensure transparency in pricing decisions.
Setting eligibility standards will be just as difficult. The guidelines say that, to qualify for assistance, borrowers must show a return on equity of at least 2 percent. They are also required to generate enough operating revenue to pay off debt in less than 10 years. These numerical targets, say the ground rules, will be applied with a measure of flexibility by taking into account related factors such as the type of business. However, the fortunes of a business also depend on intangible factors such as the abilities of the chief executive officer.
There is also concern that loans purchased will cause losses to the new body if borrowers involved failed to recover according to plan, or if loans acquired were resold at less than their purchase prices. Whether such secondary losses actually arise will become clear when the corporation comes to the end of its five-year service. If losses are suffered — which should not happen — taxpayers will have to pick up the tab. They will not accept such an outcome.
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